Amid backlash and concerns over the 20 percent tax collection at source (TCS) on credit card spending outside India, the Ministry of Finance on Friday, May 19, clarified that no TCS will be levied on individual payments using international debit and credit cards of up to Rs 7 lakh in a financial year from July 1, 2023.

In a statement released on May 19, 2023, the finance ministry said, "Concerns have been raised about the applicability of Tax Collection at Source (TCS) to small transactions under the Liberalized Remittance Scheme (LRS) from July 1, 2023. To avoid any procedural ambiguity, it has been decided that any payments by an individual using their international Debit or Credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS."

On May 16, the Finance Ministry amended rules under the Foreign Exchange Management Act (FEMA) to bring international credit card spending under the LRS. All international transactions made using credit cards when outside India have been brought under the RBI’s LRS scheme, with immediate effect. Explaining the rationale behind this move, Finance Ministry later said, "Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits. Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 2,50,000. The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits."

Further, the Union Budget 2023 has increased TCS for foreign remittances under the LRS from 5 per cent to 20 per cent (except for education and medical purposes). This rule will be effective from July 1, 2023.

However, after the latest clarification from the Finance Ministry, on May 19, 2023, TCS will not be levied on any payments made by an individual using their international debit or credit cards up to Rs 7 lakh per financial year.

"Existing beneficial TCS treatment for education and health payments will also continue," the ministry said.

Under the Liberalised Remittance Scheme (LRS), all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facilities for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Rules 2000 within the limit of USD 2,50,000 only.

WHICH TRANSACTIONS COME UNDER LRS?

As per Rule 5 of the FEM (CAT) Rules, 2000, individuals can avail of a foreign exchange facility for the following purposes, as detailed in Schedule III of the Rules, within the LRS limit of USD 2,50,000 on a financial year basis. Prior approval of the Reserve Bank would be required for remittances exceeding the specified limits.

i) Private visits to any country (except Nepal and Bhutan)
ii) Gift or donation
iii) Going abroad for employment
iv) Emigration
v) Maintenance of close relatives abroad
vi) Travel for business, attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/ check-up
vii) Expenses in connection with medical treatment abroad
viii) Studies abroad
ix) Any other current account transaction

Prior approval of the Reserve Bank is required for remittances exceeding the specified limits.

HOW THIS RULE WILL IMPACT YOU?

"Exclusion of cases involving payments by an individual using international Debit or Credit card up to Rs 7 lakh per financial year from LRS-TCS limits, is a welcome move and would bring some relief to family and leisure travelers. The spend threshold of 7 lakhs, however, remains low, for frequent business travelers, who may still look forward to a higher exemption limit, even though the base protection from TCS if expenses are borne by the employer, is available," said Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP.

"The necessary changes to the Rules (Foreign Exchange Management (Current Account Transactions Rules), 2000) will be issued separately," the ministry said.