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Backtracking from its earlier announcement, the Centre, on June 28, decided to defer the decision to include international credit card spending under the Liberalised Remittance Scheme (LRS). According to an announcement by the finance ministry, there will be no change in the rate of Tax Collected at Source (TCS) on international spending through credit cards.
This means the holders of international credit cards will not have to shell out additional charges while making transactions during their foreign trips.
The May notification
In May, the Centre announced bringing the international credit card spending with a threshold of Rs 7 lakh under the LRS and attracting a higher rate of tax collected at source (TCS) of 20 per cent. This rule was to come into effect from July 1.
Until June 30, the spending on international credit cards was excluded from the LRS through Rule 7 of the Foreign Exchange Management Rules, 2000. Under the FEMA rules, all resident individuals, including minors, are allowed to remit up to $250,000 or around Rs 2.06 crore abroad per year without prior approval from the RBI.
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The finance ministry had clarified that it was being done to bring parity in the card transactions. The debit card attracted TCS under LRS, but credit cards did not. As a result, some individuals spent more than the LRS limits using credit cards.
In the Budget 2023, the finance minister announced that the outward remittances under the LRS would attract 20 per cent TCS from July 1. This meant that international credit card spending would also attract a 20 per cent TCS.
Later in March, while moving the Finance Bill 2023 in Lok Sabha, finance minister Nirmala Sitharaman had said RBI had been asked to look into ways to bring credit card payments under the LRS.
After the announcement of bringing credit cards under LRS, experts argued that this would add a compliance burden on banks and that 20 per cent TCS was too high. If the move was targeted towards tracking transactions, a lower TCS of 1-2 per cent would have been enough.
What now?
On June 28, the finance ministry notified that no TCS would be applicable on foreign expenditure through international credit cards till further notification. According to experts, the main reason behind this is that financial institutes need more time to modify their information technology systems to apply the tax.
So, for now, the users of international credit cards on their foreign trips will not have to pay any tax on their spending.
What else has changed?
The June notification also said that TCS would apply to foreign spending above Rs 7 lakh. This will come into effect on October 1 instead of July 1. Notably, Rs 7 lakh is a combined threshold for all the spending, including medical purposes and education.
This implies there will be no TCS up to Rs 7 lakh remittance under LRS. Beyond this Rs 7 lakh threshold, TCS shall be levied at the rate of 0.5 per cent if remittance for education is financed by an education loan, 5 per cent for remittance for education or medical treatment and 20 per cent for others.
The purchase of a foreign tour package will also be subject to the Rs 7 lakh limit, but it will be counted separately from the above transactions.
On the purchase of overseas tour packages, a TCS of 5 per cent will be applicable on payments up to Rs 7 lakh. Above the Rs 7 lakh threshold, 20 per cent TCS would be levied from October 1. Currently, the purchase of foreign tour packages attracts 5 per cent TCS without a threshold.
