Introduction:
Credit card users in India are set to experience a significant change in their financial transactions as the tax collected at source (TCS) rate for foreign remittances has been increased from 5% to 20% starting from July 1, 2023. This development will have a direct impact on individuals planning to book foreign tour packages using their credit cards. In order to prevent the evasion of tax collected at source, the Ministry of Finance has requested the Reserve Bank of India (RBI) to bring credit card payments during foreign tours under the purview of the Liberalised Remittance Scheme (LRS).
Reasons for Bringing Credit Card Payments for Foreign Travel under LRS:
Finance Minister Nirmala Sitharaman has highlighted the issue of credit card payments for foreign tours not being captured under the LRS, resulting in the evasion of tax collection at source. In response, the RBI has been urged to address this concern and include credit card payments for foreign tours within the ambit of the LRS to ensure appropriate tax collection.
Impact on Credit Card Users:
Once credit card payments for overseas tour packages are included under the LRS, it is expected that all transactions made using credit cards will be subject to a 20% TCS. This means that individuals who choose to use their credit cards for booking foreign tour packages will have to bear an additional cost equal to 20% of their total expenses. It is important to note that this tax will also be applicable to other payment methods, such as bank transfers and debit card payments, which are already covered under the LRS.
Objectives of Including Credit Card Payments under LRS:
The inclusion of credit card payments for foreign tours under the LRS serves two primary purposes. Firstly, it ensures uniform taxation for the purchase of foreign tours, irrespective of whether they are booked through local or overseas travel agents. Secondly, it facilitates a broader tax net by ensuring effective tracking and reporting of overseas remittances.
Challenges Ahead:
Bringing credit card transactions under the ambit of the LRS poses certain challenges. Experts suggest that it will be a complex task to differentiate transactions that attract the 20% TCS from those that do not. This becomes particularly challenging considering that some transactions, such as education and medical expenses, are currently exempt from the higher TCS rate. Additionally, banks will face the arduous task of tracking and categorizing each credit card transaction, especially given the involvement of numerous international merchants. Implementing such categorization would require substantial changes in the credit card system itself.
Steps for Credit Card Users:
In light of these changes, credit card users who frequently book foreign tours must take certain steps to ensure compliance and manage their financial affairs effectively. It is essential to maintain proper documentation, including invoices, receipts, and bank statements, to provide evidence that payments fall under the LRS and meet regulatory requirements. Users should also obtain a certificate of tax collected at source from their respective banks to facilitate tax claims against their liability.
Furthermore, credit card users must be prepared to justify the sources of income utilized for foreign tour payments during any potential tax return audit. Careful verification of Form 26AS, which provides information on TCS deposits, should be conducted to ensure it aligns with the credit card statements. Additionally, users should ensure their PAN details are up to date in the bank's records to avoid any credit-related issues.
Conclusion:
Credit card users in India need to be well-informed about the recent changes regarding the 20% TCS on credit card transactions for foreign tour packages. Adhering to the LRS regulations, maintaining accurate documentation, and managing finances wisely will help individuals navigate these tax implications effectively. By staying informed and complying with the revised tax requirements, credit card users can ensure a smooth financial experience while planning their foreign trips.