How to minimise the impact of 20% TCS on international travel: Every dollar spent abroad will be subject to a 20% tax collected at source (TCS) beginning in July. No longer will international credit cards be exempt from this regulation. Although you can claim a refund on this TCS when you file your tax returns, you must initially pay the higher upfront cost.
How to minimise the impact of 20% TCS on international travel
Any international travel package, airline and accommodation bookings will cost more as of 1 July, as the TCS of 20% will be applied to all debit card, credit card, foreign currency, and forex card transactions made outside of India. TCS applies regardless of whether the excursion package is paid for in Indian rupees or foreign currency.
Previously, individuals could use their credit cards abroad without worrying about the Liberalised Remittance Scheme (LRS) and TCS implemented by the Reserve Bank of India. Under the new standards, however, every international credit card transaction will be subject to the TCS rate specified by the LRS. However, in response to criticism, the Finance Ministry clarified on 19 May 2023 that TCS will no longer be imposed on payments made by individuals using international debit or credit cards if the amount is less than Rs 7 lakh per fiscal year.
Any payment exceeding Rs 7 lakh is subject to 20 per cent TCS
“The TCS has been applicable to international money transfers since 1961, and the LRS since 2004. There have been numerous adjustments to the amount and circumstances of TCS deductions over time. Prior to this amendment, a TCS applied to all forex instruments, including foreign currency, forex cards, debit cards, etc. The only exception to this rule was credit cards. BankBazaar.com’s chief executive officer (CEO) Adhil Shetty explained that credit cards have been included in the TCS on LRS in order to eliminate the differential treatment between debit cards and credit cards and to capture the total expenditures under LRS.
First, we must distinguish between tax withheld at source and tax collected at source
Your employer deducts TDS from your salary, and your bank deducts it from your interest income. The seller collects TCS at the point of the transaction.
“TDS pertains to income and is deducted by the income recipient, whereas TCS pertains to expenditure and is deducted by the seller when availing of notified products or services. For example, TCS is applied to the purchase of motor vehicles valued at more than Rs. 10 lakhs. When goods are used in the manufacturing, refining, or production of other goods, TCS is not required. Abhinav Soomaney, managing partner of CryptoTax International Pvt Ltd, stated that late filing of TCS returns incurs a penalty of Rs 200 per day, not exceeding the TCS amount.
Under LRS, Indians can send up to $250,000 per financial year to other countries for a variety of purposes, including education, travel, medical treatment, investments, and even family gifts.
Previously, international credit card use overseas was not included in the aggregate limit under LRS. It included debit cards, foreign exchange, traveler’s checks, forex cards, and bank transfers. With the recent amendments, however, international credit card transactions will be subject to LRS.
“As a direct result of this new 20% TCS rule, travellers will need to have more cash on hand, as their credit card limit must be increased. For example, if you planned to spend USD 2500 on travel, lodging, and other expenses while abroad, and presuming the exchange rate is 84 per USD, you would need approximately 2 lakhs (excluding conversion fees and GST) to acquire the necessary USD. After 1 July, you will be required to pay an additional 20% as TCS. This means you would have to pay an additional 40,000 to acquire the same USD 2500,” BankBazaar explained.
Exemptions
Expenses incurred by an employee on a business trip that are covered by the employer are not subject to LRS and are exempt from the 20% TCS.
In addition, the new provision will not affect payments made for educational or medical purposes. The last Union Budget proposed maintaining a 5% TCS on foreign remittances for education and medical care exceeding Rs 7 lakh. It was stated that the 0.5% TCS on foreign remittances exceeding Rs 7 lakh for education through loans from financial institutions will remain unchanged.
In addition, TCS will not apply to payments made in India for the purchase of foreign products or services, such as newspapers or online streaming services.
Why the shift
“Data obtained from leading money transmitters under LRS reveals that international credit cards with limits exceeding the current LRS limit of USD 250,000 are being issued. In the interest of uniformity and equity in the treatment of modes of foreign exchange withdrawal and for the purpose of capturing total expenditures under LRS for prudent foreign exchange management and to prevent the circumvention of LRS limits, the differential treatment between debit cards and credit cards needed to be eliminated. In some instances, the LRS payments have been disproportionately high compared to the reported incomes. Similar to TDS, TCS is NOT an ultimate tax burden. It can be claimed as a refund when filing ITR,” the Finance Ministry announced in a May 16 notification.
The government stated that only tour travel packages, gifts to non-residents, and domestic high-net-worth individuals investing in real estate, bonds, and equities outside India would be affected.
The Finance Ministry has exempted from the 20% tax payments made by individuals using their international debit or credit cards up to Rs 7 lakh per fiscal year. Note that this threshold limit only applies to debit and credit cards. It does not apply to foreign exchange cards or cash transactions.
The Rs 7 lakh card limit is not applied to each card individually
The Rs 7 lakh exemption limit is not to be applied to each individual credit or debit transaction. Therefore, even if the total amount spent on each card is less than Rs7 lakh, TCS will apply if the total amount spent across all cards exceeds Rs7 lakh.
“It is probable that banks will collect an additional 20% towards TCS from cardholders by including this information on their card statements. Consequently, the TCS amount is likely to be included in the periodic bank statements that are generated and issued. It will also have an effect on the aggregate spending limits on these cards, according to S. Vasudevan, Managing Partner at Lakshmikumaran and Sridharan Attorneys.
What if someone spends Rs 4 lakh using credit cards issued by various banks?
Compliance will be difficult, and there is little clarity on the subject. As the TCS’s practical operation remains unknown, the government must issue a notification.
“As of July 1, banks issuing credit cards will be responsible for collecting 20% TCS.” This may be difficult for banks to trace, and they may have to rely on the credit card users’ own declarations regarding the nature of the transaction. Partner at Nangia Andersen India, Neeraj Agarwala, stated that they will also need to create an IT system to verify payment details, capture this information, and ensure timely compliance.
Demand a common platform
“A common platform is required for credit card companies to be able to monitor international transactions made by an individual using multiple cards. In the absence of the same implementation will continue to be difficult. In this situation, the bank or credit card company bears the burden of compliance; therefore, it is unlikely that individuals can be prosecuted. According to Pallav Pradyumn Narang, a partner at CNK, issuers will be eager to avoid such penalties and may implement more stringent measures than required, which could result in a large number of cardholders being denied credit.
“Cards with the same PAN will be regarded as a single card, thereby eliminating the possibility of using multiple cards to enjoy multiple limits. The exemption threshold should be interpreted in accordance with its intent, and as such, the exemption limit shall be calculated on an aggregate basis that includes all credit and debit cards. It is only a matter of time before international credit cards and international debit cards are directly linked to PAN in order to monitor LRS limits and exemption threshold, according to Keshav Singhania, a head-private client at Singhania & Co. TCS is collected in advance. You can purchase a forex card and are permitted to carry up to $2,000 with you, but you must pay the TCS on the entire balance, regardless of whether you use it in a single or multiple journeys.
The TCS threshold modification of Rs 7 lakh per financial year is only applicable to international purchases made with international credit or debit cards. The exemption will not apply to transfers made from India for travel arrangements.
How can one reduce this TCS burden when travelling internationally?
In the case of family vacations, since each resident individual, including minors, has his/her own LRS limits and therein aggregate card spends up to Rs 7 lakh in a financial year, family members can distribute card spends across various family members so as not to exceed the threshold limit for each individual, as suggested by Singhania.
Alternatively, he noted, families may explore options in which their friends and relatives abroad incur the costs and are reimbursed in cash.
“To circumvent TCS on an international trip, individuals can book flights and hotels in separate transactions and/or use multiple credit cards for each booking, keeping the total amount below the Rs 7 lakh threshold,” explained Soomanee.
Rather than purchasing a tour package, book individual components of your trip such as airfare, lodging, and sightseeing separately.
For instance, if a person schedules a trip to the Maldives through a travel agent and his total package costs Rs 8 lakh, the agent will collect 20% TCS. However, if the same journey is booked privately on separate platforms, Rs 3 lakh for flights and Rs 4 lakh for accommodations, TCS will not be collected.
You can also split your payment between debit and credit cards instead of using a foreign currency card
Even a single rupee transaction involving the transfer of foreign currency onto a forex card would be subject to 20 percent TCS, with no exemption threshold. In contrast, if an individual spends Rs 5 lakh on a debit card and Rs 4 lakh on a credit card internationally in a given fiscal year, only Rs 2 lakh will be subject to a 20% TCS.
When using an international credit card for international transactions, cardholders are required to claim a tax credit when submitting their annual tax returns in India.
TCS is not an additional tax; it is merely a collection of tax on your behalf, i.e. a tax paid in advance. While you must pay more up front for international travel, you can claim the tax back on your annual tax returns.
The TCS credit may be applied against the actual tax liability due at the end of the year. If there is no such tax liability, a refund can be claimed at the end of the year.”The disadvantage of upfront TCS is the opportunity cost with a rising cost of capital. Once quarterly TCS returns are lodged by the authorised bank, TCS amounts will appear on Form 26AS of the Indian resident.
‘Regressive policy’ allegation
In addition, there is no procedure for requesting exemption from TCS provisions for LRS remittances, as explained by Singhania.
Several experts, speaking on the condition of anonymity, described the government’s action as retrogressive, citing the fact that many individuals would choose to ask their friends and family abroad to incur expenses on their behalf, which they would then reimburse by transferring the equivalent amount into their Indian bank accounts.
“TCS on LRS is not only a regressive policy in principle, but also a draconian policy in practise. Supreme Court attorney Vivek Siddharth Ojha stated that it has the potential to create a clandestine market in foreign exchange for travel and undermine the government’s efforts to curb the country’s illicit cash economy.
