International Credit Card Transactions are now incorporated into RBI’s Liberalized Remittance Scheme, likely compounding income tax problems.
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The imposition of a 20% TCS (Tax Collected at Source) on international credit card transactions has created a buzz in the business markets. Starting May 16, 2024, global credit card spending outside India will fall under the Liberalized Remittance Scheme (LRS). Also, effective from July 1, 2024, these transactions will attract a higher TCS rate of 20% making it expensive.
The Central Government’s Ministry of Finance issued the revised regulations under FEMA (Foreign Exchange Management Act) to include international credit card spending under LRS which will bring it within the limit of LRS i.e., USD 250K. Various personalities from the business and finance world were intrigued by the changes announced by FinMin.
“Foreign travel pe 20% TCS; foreign credit card spend pe 20% TCS and LRS limit me lana bahut hi interesting rule hai. Haan political donations pe kabhi TCS nahi lagne waala – yeh tay hai! Wahaan aapko ulta income tax mein rebate milegi.” Tweeted by Ashneer Grover, Entrepreneur.
“This is big. Removing rule 7 changes the game. Every international credit card transaction, from today, made by an individual will be under LRS limits. Means 5% TCS till July 1 and 20% TCS after that.” Tweeted by Deepak Shenoy, CEO of Capital Mind.
Let’s understand Rule 7 of FEMA
Point 7 of the rule claims, “Use of International Credit Card while outside India – Nothing contained in rule 5 shall apply to the use of International Credit Card for making payment by a person towards meeting charges while the similar person is on a visit outside India.”
It’s intriguing to note that Rule 7 was introduced nearly 20 years back as a liberalization measure to excuse International Credit Card (ICC) deals from the dimension of restrictions set out under Rule 5, i.e., deals included in Schedule III to Current Account Transaction Rules, 2000 necessitating advance RBI consent beyond financial ceilings. Further, no separate monetary/item-wise limitation was prescribed by RBI for the use of ICCs when the correction was made.
Thus the use of ICC by citizens on a visit outside India or for international purchases on the Internet was not supposed to be included while calculating the overall LRS limit of USD 250,000 per person per fiscal year.
The same now has been excluded to make sure that ICC deals are also considered for determining the limit of USD 250,000 under LRS.
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Exceptions to 20% TCS
The exceptions made to the tax are just the credit card transactions involving expenses related to educational or medical reasons. For the motive of any education, if the money remitted out is a loan attained from any financial institution as defined in section 80E and for medical purposes abroad, the TCS stands at 0.5% and 5% respectively.
Although, on foreign trip packages and for other remittances like buying stocks, and goods abroad, the TCS limit has been proposed to be 20% in the Budget 2024.
The money spent on ICC deals will decrease the maximum ceiling available under LRS. Effectively, 20% is the amount that gets blocked as a refund and can be taken by the taxpayer only after filing ITR, which may cause cash flow issues for some taxpayers. Yet, the experts are seeking more clarity on how authorities will differentiate between international online purchases and credit card spending abroad.
