20% TCS On International Credit Card Usage

18 MAY, 2023

Under the LRS (Liberalised Remittance Scheme) in Budget 2023, the TCS (Tax Collected at Source) for foreign remittances will now be 20% rather than 5%, taking force from July 1, 2023. It applies to all international travels, foreign money transfers, and other international transactions except for medical and educational reasons. Below, you will understand its meaning, limits, guidelines, and implications.

What is Tax Collected at Source (TCS)?

TCS stands for Tax Collected at Source. The seller collects it from the buyer and deposits it with the tax authorities. Under Section 206C of the Income Tax Act 1961, sellers must have a Tax Collection Account Number to collect TCS from buyers. For instance, if you buy an item worth ₹ 100, you pay ₹ 20 (₹ 80+20) as tax at the time of purchase. The seller transfers this amount to a bank branch authorised to accept payments. You must pay this tax while purchasing items, paying in cash to the seller, issuing a draft or cheque, conducting transactions, etc.

Using Credit Cards for International Transactions

Carrying cash abroad has become safer and easier with credit cards due to their security and convenience. However, credit cards are not enabled for international transactions by default, and you must activate them through net banking or the credit issuer’s mobile app. Remember, transaction charges will apply if you use your card for international transactions, including GST, currency conversion charges, and foreign currency markup fees.

TCS Applicability on International Credit Card Payments

The Union Budget 2023-24 brought several changes to the Indian taxation system, including TCS for international transactions. Under the Foreign Exchange Management Act (FEMA), the 20% TCS is applicable not only while sending money abroad to an individual but also includes buying assets, shopping, or travelling abroad. Earlier, the TCS was 5% for remittances exceeding ₹ 7 Lakh. However, with the latest hike in TCS, this amount will apply to everyone except for education and medical treatment-related expenses.

Legal Provisions and Guidelines Governing TCS on International Credit Card Transactions

1. Sellers

Any organisation or individual authorised to collect TCS includes central and state governments, statutory corporations or authorities, local authorities, companies, partnership firms, co-operative societies, HUFs, etc.

2. Buyers

Buyers for TCS include any individual who receives the goods, including the central and state governments, public sector entities, high commission embassies, social or sports clubs, consulates, etc.

3. Goods Covered

Goods and transactions covered for TCS include liquors, timber wood, forest produces, scrap, minerals, bullion, jewellery, motor vehicles, toll plaza, parking lot tickets, etc.

Understanding the Implications of 20% TCS

The application of 20% TCS has made foreign trips and international transactions much more expensive than earlier. It will impact both buyers and sellers in many ways. Let’s take a look.

- Impact on Individuals Making International Credit Card Transactions-

Any expense on international credit cards will now attract a higher tax rate of 20% from July 1, 2023. That is because any international credit card transaction will fall under LRS, enabling a higher TCS levy. Earlier, the LRS limit did not include international credit card transactions on foreign trips and purchases. Now, they will play a crucial role in determining the $250,000 limit under LRS.For instance, if your credit card has a limit of up to ₹ 5 Lakh and you spend ₹ 3 Lakh for transactions like hotel, restaurants, shopping, etc., using that card on a foreign trip, you will need to pay 20% as TCS, which amounts to ₹ 60,000. Moreover, your bank will charge GST on the credit card when used for international transactions.

- Impact on Businesses Accepting International Credit Card Payments-

Businesses may see a reduction in their sales and transactions due to the increased cost of goods and services. While things become more expensive for consumers, they will need to think twice before spending. Those who cannot afford it may never come.

Compliance and Reporting Requirements

- Any government office should deposit the sums collected on the same collection day.

- The seller must deposit the TCS collection in Challan 281 within a week from the last day of the collection month.

- If the collector does not collect the tax or pay it to the government before the due dates, they will pay an interest of 1% per month.

- Tax collectors must submit quarterly TCS returns through Form 27EQ.

Procedures for TCS Collection and Remittance

The seller adds 20% TCS to the product's cost you must pay at the time of purchase. Once collected, they must transfer it to the government according to the given guidelines in Challan 281. They can transfer it through any RBI branch, any authorised bank, or electronically

Relief Provisions for Certain Individuals and Businesses

When you make an international transaction using credit card, the credit card issuer will deposit 20% TCS against your PAN, and you can claim it at the time of filing ITR. For that, you will need a TCS certificate that the collector will provide you at the time of deduction. Moreover, you can apply for discounted TCS using Form 13 if the Assessing Officer finds you justifiable for a lower rate. Form 27C also makes you eligible for total TCS exemption if you use the goods for manufacturing and processing purposes rather than for trading.

Potential Challenges in Implementing and Complying with 20% TCS

While the government aims to track high-value international transactions through the move, tax experts and people have yet to welcome it as a favourable implementation. For successful implementation, the government issued a clarification stating that the TCS does not apply to all foreign remittances. It applies to remittances falling under the LRS purview only. Any payment exceeding $250,000 needs RBI approval after ensuing proper oversight and regulations beyond the prescribed limit.

Final Thoughts on the Impact of 20% TCS on International Credit Card Transactions

With the changing scenarios, modifying the existing regulations and introducing new ones becomes necessary. The recent changes made in Budget 2023 significantly impact international remittances, especially those falling under LRS. Coming into effect from July 1, 2023, their primary aim is to uplift the Indian society’s backward sections and aid education and infrastructural development in the country. Kotak Bank supports this change and does its best to benefit the customers in every possible way.