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The holiday season is here and people are fretting about booking their foreign trips because if you are purchasing an overseas tour package from a travel agent in India, you will have to pay a tax collected at source (TCS) of 20 per cent from July 1, 2023.
Currently, if you book an overseas tour package with local tour operators or online travel aggregators you pay 5 percent TCS. From July 1, 2023, a 20% TCS will apply on such foreign holiday packages. The new rule, however, for overseas tour packages appears to have a potential loophole.
While booking such a foreign package with an Indian tour operator will attract TCS right away, with a foreign tour operator, you can possibly escape TCS until international payments on your credit card cross Rs 7 lakh a year.
As of FY 2023-24, the TCS, which is a tax collection mechanism implemented by the government to ensure tax compliance, has been increased from 5% to 20% for most overseas transactions, excluding educational and medical purposes, effective from 1 July 2023.
When it comes to the travel industry, the responsibility for collecting and remitting the TCS lies with the tour operator or the authorized agent. Even if you purchase foreign currency individually from an authorised dealer for your foreign trip, you have to pay TCS of 20 per cent.
However, when you do plan your trip, there are a couple of routes you can take that may affect the applicability of TCS.
First, you could book through an Indian travel agent by making a domestic payment, or second, use an international travel website with your international credit card.
When you book an overseas tour package with an Indian travel agent or website like MakeMyTrip, they are obligated to collect TCS on all international packages. On the other hand, international travel websites are not required to charge TCS on purchases made by Indian customers. Instead, the credit card companies levy TCS on foreign currency payments that exceed Rs 7 lakh.
For both these scenarios, TCS usually applies. However, a potential loophole lies in using your credit card to purchase from an international tour operator. "In this case, TCS won't apply for transactions up to a limit of Rs 7 lakh since the TCS would be levied by a credit card company. This approach could provide substantial savings, especially for middle-class families, by avoiding the complex and time-consuming process of claiming a tax refund. Therefore, you can dodge TCS up to an amount of Rs 7 lakh if you book online via an international travel website, " explained Ankit Jain, Partner, Ved Jain & Associates.
Example: If you were to buy “overseas tour package” from Indian tour operator costing Rs4 lakh, the applicable TCS would be Rs 80,000, thereby increasing initial expenditure on the package to Rs 4 80 lakh. However, if an “Overseas Tour Package” is booked through a foreign tour operator costing Rs 4 lakh, no TCS would be attracted as it is lower than the threshold of Rs 7 lakh. Therefore, booking through a foreign tour operator may seem to be a lucrative option.
Some of the foreign websites also provide options to their customers to pay in their domestic currency, i.e., in Rupees for Indians. Per se, a payment made in Indian Rupees even if to a foreign website should not be counted towards their quota of Rs 7 lakh, clarified Jain. So, it is possible to avoid the TCS by making a payment in Indian Rupees on foreign websites. "However, we will have to wait and see how credit card companies handle this situation so that they do not attract the ire of the Government," he said.
One key point to note is that the TCS is imposed on 'Overseas Tour Packages' at a rate of 20%. The term 'Overseas Tour Package' isn't well-defined in the law. It's generally understood as a package combining two or more items, such as flights and accommodation, or accommodation and sightseeing, or accommodation and meals, or any mix of these. However, there's ambiguity regarding whether booking only flights would be considered a package or not.
"Since the TCS is applicable only in case of “overseas tour package”, the literal meaning of the provision would mean air tickets and hotel bookings made independently and paid in INR would not attract TCS," said Vipul Jai, Partner,
PSL Advocates and Solicitors. What this means is that if you book your international air ticket by yourself it will not attract any TCS.
If you book a trip to Maldives with the help of a travel agent and his total package costs Rs 8 lakh, 20% TCS will be collected by the agent in India. However, if that same trip is booked himself, Rs 3 lakh on flights and Rs 4 lakh on accommodation, both paid for individually on separate platforms, no TCS will be collected. " Individuals can book flights and hotels in separate transactions and/or use multiple cards for each booking, keeping the amount below the Rs. 7 lakh threshold," said Abhinav Soomaney, Managing Partner, CryptoTax International Pvt Ltd.
Jain suggests that some individuals are even opting to ask their friends or relatives living abroad to make the payment for their tour package and subsequently reimburse the said amount in their bank account(s) in India, to avoid paying TCS.
For more details on TCS and overseas expenses, you can read our explainer here.
You can also read details of how TCS will apply on higher education overseas here.
For more details on TCS and overseas expenses, you can read our explainer here.
You can also read details of how TCS will apply on higher education overseas here.
