The Finance Ministry has made a significant announcement on June 28, deferring the implementation of the higher Tax Collected at Source (TCS) rate on expenditure abroad for three months.
The government had planned to increase the TCS rate from 5 percent to 20 percent starting from July 1. However, following the ministry’s latest announcement, the increased TCS rate will be applicable from October 1.
Additionally, the Finance Ministry has clarified that expenses incurred through international credit cards and debit cards abroad will not be subject to the Liberalized Remittances Scheme (LRS), meaning TCS will not be applicable to such transactions even after October 1.
Credit Card Transactions Exempted from LRS: Finance Ministry’s Announcement
The ministry stated in its announcement, “To provide sufficient time for banks and card networks to make necessary IT-based solutions, the government has decided to defer the implementation of its notification dated May 16, 2023.
This implies that transactions conducted abroad using international credit cards will no longer fall under the purview of LRS, thus exempting them from TCS. The press release dated May 19, 2023, is now suspended.”
Finance Minister’s Plan and Confusion Surrounding TCS Implementation
The clarification from the Finance Ministry comes after a period of uncertainty regarding the 20 percent TCS rule applicable to specific transactions.
Finance Minister Nirmala Sitharaman had informed Parliament during the budget session in March about the government’s plan to bring credit card payments during foreign travel under the purview of LRS, as such payments were previously exempt from TCS.
On March 24, the Finance Minister stated, “We have requested the RBI to consider bringing credit card payments during foreign travel under LRS so that TCS can be imposed.”
The budget presented earlier this year had proposed increasing the TCS rate on foreign tour packages from 5 percent to 20 percent.
Clarity Amidst May 16 Notification Confusion
The May 16 notification issued by the government led to widespread confusion. Sources revealed that banks’ systems were currently unable to differentiate between various categories of expenses incurred abroad.
The system struggles to distinguish whether credit card payments are made for educational purposes or medical treatments.
Impact of Rule Change on Individuals
According to the Finance Ministry’s latest clarification, individuals making credit card payments while traveling abroad will be exempt from the LRS and will not be subject to TCS.
However, if a person uses a credit card for foreign transactions within India, they will fall under the purview of LRS, and TCS will be applicable if they exceed the annual limit of Rs 7 lakh.
