Ministry of Finance said the decision was taken to give adequate time to banks and card networks to put in place requisite IT-based solutions
- Overseas spending using credit cards not to attract TCS, says govt
- The higher TCS rate will be applicable only when the LRS payments exceed the threshold of Rs 7 lakh
- For the purchase of an overseas tour programme package, the TCS shall continue to apply at the rate of 5%for the first Rs 7 lakhs per individual per annum
In the Budget this year, certain changes were announced to the system of Tax Collection at Source (TCS) on payments under the Liberalised Remittance Scheme (LRS) and on overseas tour program packages. These were to take effect from 1st July 2023. It was also announced in March that credit card payments would be brought under the LRS.
In response to the comments and suggestions, the government has decided to make suitable changes. For those investing in global stocks or international real estate, this is good news as now they get more time to save on tax outgo.
Firstly, it has been decided that there will be no change in the rate of TCS for all purposes under LRS and for overseas travel tour packages, regardless of mode of payment, for amounts up to Rs. 7 lakh per individual per annum. It has also been decided to give more time for the implementation of the revised TCS rates and for the inclusion of credit card payments in LRS. The changes are detailed below.
Sub-section (1G) of section 206C of the Income-tax Act, 1961 provides for Tax Collection at Source (TCS) on (i) foreign remittance through the Liberalised Remittance Scheme (LRS) and (ii) sale of overseas tour program package.
Through the Finance Act 2023, amendments were carried out in sub-section (1G) of section 206C of the Act. These amendments, inter alia, increased the rate of TCS from 5% to 20% for remittance under LRS as well as for the purchase of an overseas tour program package and removed the threshold of Rs 7 lakh for triggering TCS on LRS. These two changes were not applicable when the remittance is for education or medical purpose. These amendments were to take effect from 1st July 2023.
The Government had notified Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 vide an e-gazette notification dated 16th May 2023 to remove the differential treatment for credit cards vis à vis other modes of drawal of foreign exchange under LRS.
After discussions with various stakeholders, and taking into account comments and suggestions received, the following decisions have been taken by the government:
i) To give adequate time to Banks and Card networks to put in place requisite IT based solutions, the Government has decided to postpone the implementation of its 16th May 2023 e-gazette notification. This would mean that transactions through International Credit Cards while being overseas would not be counted as LRS and hence would not be subject to TCS. The Press Release dated May 19, 2023 stands superseded.
ii) Threshold of Rs. 7 Lakh per financial year per individual in clause (i) of sub-section (1G) of section 206C shall be restored for TCS on all categories of LRS payments, through all modes of payment, regardless of the purpose: Thus, for first Rs 7 Lakh remittance under LRS there shall be no TCS. Beyond this Rs 7 Lakh threshold, TCS shall be
a) 0.5% (if remittance for education is financed by education loan);
b) 5% (in case of remittance for education/medical treatment);
c) 20% for others.
For purchase of overseas tour program package under Clause (ii) of Sub-section (1G), the TCS shall continue to apply at the rate of 5% for the first Rs 7 lakhs per individual per annum; the 20% rate will only apply for expenditure above this limit.
iii) Increased TCS rates to apply from 1st October, 2023: The increase in TCS rates; which were to come into effect from 1st July, 2023 shall now come into effect from 1st October, 2023 with the modification as in (ii) above. Till 30th September, 2023, earlier rates (prior to amendment by the Finance Act 2023) shall continue to apply.
There will be no TCS on expenditures under LRS under clause (i) of Sub-section (1G) for the first Rs. 7 lakh, irrespective of purpose. The government will issue the circular and Frequently Asked Questions (FAQs) to clarify various practical issues in implementing this provision.
Sandeep Jhunjhunwala, Partner at Nangia Andersen LLP says, “Mentioning the unpreparedness of the IT infrastructure to deal with new TCS provisions on credit card spending, banks and financial institutions had made representations to the Government to defer the LRS-TCS implementation timelines. The increase of TCS rates on LRS for purposes other than for education and medical treatment had been concerning taxpayers ever since the Finance Bill 2023 was tabled.
The release, while providing timeline extension till September 30, 2023, also clarifies that transactions done through international credit cards while being overseas would not be counted as LRS transactions and hence not subject to TCS. Also, it simplifies the overall TCS framework under LRS by restoring it back to earlier limits i.e. 0.5 percent on education financed by loan beyond 7 lakhs and 5 per cent on medical treatment/ education (other than financed by loan). Increased TCS of 20 per cent would continue to apply from October 1, 2023, on LRS for other purposes and for purchase of overseas tour program packages beyond spending of Rs 7 lakhs. The proposal to come up with FAQs to provide clarification on practical difficulties is a much sought after requirement.”
The TAAI committee along with FAITH, has had various communications/meetings since February 23 along with officials of Finance Ministry / CBDT / Income Tax authorities in New Delhi on the abolition of Tax Collected at Source (TCS) on Outbound Tour Packages, where the Finance Minister in her Finance Budget for 2023-24 had increased the TCS from 5% to 20%.
Due to a lack of clarity amongst the trade and stakeholder partners TAAI had made several representations to the Ministry to abolish or defer the increase of TCS to 20%.
With a view to give time to the trade to understand the detailed modalities and obtain detailed clarity, the Government has differed the increase of TCS to 20% from the effective date of 1st July’23 to 1st October’23 vide their circular as appended for your perusal.
Further, TAAI shall once again be in dialogue with the officials to obtain clarity for ease of doing business and to ensure procedural aspects are well explained with FAQs in regards to the clause effective 1st October’23 in the notification which reads as:
For the purchase of overseas tour program packages under Clause (ii) of Sub-section (1G), the TCS shall continue to apply at the rate of 5% for the first Rs 7 lakhs per individual per annum; the 20% rate will only apply for expenditure above this limit.
The above shall be challenging to comply with and obtain an undertaking from the travellers.
TAAI’s motive is to ensure that the increase of 20% doesn’t happen at all and we shall try our level best to work on the same and use our good offices on behalf of our members to work diligently towards the same.