Recent amendments to credit card spending rules under the Foreign Exchange Management Act (FEMA) will have significant tax implications. Learn more.
The central government has recently amended the FEMA rules, bringing credit card spending outside of India within the scope of the Liberalised Remittance Scheme (LRS). As a result, starting from July 1, credit card transactions made overseas will be subject to a higher rate of tax collected at source (TCS) at 20 per cent. This change, implemented in collaboration with the Reserve Bank of India (RBI), has significant implications for individuals who frequently make international transactions.
Understanding The Impact:
Previously, the TCS rate on expenses under LRS was lower and only applied to package tours. However, the latest amendment in the Budget 2023-24 has raised the TCS rate to 20 per cent without any threshold, excluding education and medical treatment expenses. Currently, the LRS has a limit of $250,000 (approximately Rs 2 crore), and any remittance exceeding this amount requires approval from the RBI. Consequently, individuals with substantial spending on international transactions will now need to carefully plan their foreign remittances to ensure compliance with the regulations and avoid violating any norms.
Higher Costs For Independent Travel:
One notable consequence of the new rule is that any overseas credit card purchase, excluding education and medical purposes, will now attract a 20 per cent TCS. This change affects not only package tours but also self-planned foreign trips. For example, if you book a museum entry ticket for €100 in Paris using your credit card from India, you will be required to pay TCS on that amount. Similarly, expenses like buying a Starbucks latte or using Uber while travelling abroad will also incur a 20 per cent TCS. Even subscription payments for international magazines made through credit cards will be subject to the new tax regulations.
Says Suneel Dasari, founder and CEO of EZTax.in: "In consultation with the RBI, the Central Government has amended the LRS rules to include international credit cards. Beginning on July 1, 2023, international credit card purchases will incur a 20 per cent TCS as it comes under the LRS limit of US$2,500,000."
"However, there is no clarification yet on whether a minimum transaction threshold applies to international credit card purchases. If the TCS is applied to transactions below a certain value, such as less than $100, it may significantly impact individuals' spending habits abroad. Moreover, since individuals must wait for one year before filing their income tax returns and claiming their TCS refund, their cash flow will be affected," adds Dasari.
Operational Challenges For Banks & Credit Card Companies:
These changes also have implications for banks and companies that issue credit cards. They must now adapt their operating procedures to consolidate data and facilitate the filing of tax returns. This adjustment is necessary to comply with the amended regulations and ensure a smooth implementation of the revised TCS requirements.
The recent amendment to the rules under the FEMA brings credit card spending outside of India under the purview of the LRS. With credit card transactions made overseas now subject to a 20 per cent TCS, individuals who frequently engage in international spending must plan their remittances carefully to adhere to the regulations and avoid violations. Moreover, the impact on independent travel expenses and the need for banks and credit card companies to adjust their operational procedures should be considered. Therefore, stay informed and ensure compliance to manage your finances effectively in light of these new tax rules.