Tax on international credit card transactions is fair

The government recently announced that foreign payments through credit cards will be brought within the purview of Liberalised Remittance Scheme (LRS). This invited criticism from the industry and individual taxpayers and the announcement was termed as “Tax Perversion”, “Tax Terrorism”, “A Broken-Down Tax Assessment System”, etc.

Existing mechanism –

• The usage of an international credit card to make payments towards meeting expenses during a trip abroad was not covered under the LRS.
• These spendings were excluded by way of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.
  • Rule 7 exempts the use of international credit cards from the LRS for payments by a person towards meeting expenses while such a person is on a visit outside India.

Recent announcement by the Government –

• Rule 7 has now been omitted, paving the way for the inclusion of such spending under LRS.
• It removes the exemption given to the use of international credit cards for meeting expenses by a person when he is abroad.
• The notification does not affect any changes in the use of international credit cards by residents while in India.
• Not only foreign tour packages but 20 per cent TCS rule also will apply to credit cards on international transactions.
• This means even direct booking would come under the ambit of 20 per cent TCS.

Government’s subsequent clarification –

• Payments made by an individual using international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and will not attract TCS.
• It is reiterated that the rate of TCS of 5 per cent and the Rs. 7 lakh threshold still applies for education and medical expenses (including incidental expenses).
• Further, remittance out of educational loans would be subject to TCS of 0.5 per cent only.
• The higher rate of TCS is only for investments, gifts, donations, and overseas travel.

Government’s perspective on bringing TCS on LRS –

• Multi-fold Increase in Remittances Under LRS —
  • • As per data published by the RBI, LRS remittances which were Rs 0.9 trillion in FY 2019, crossed Rs 2 trillion in FY2023.
    • During FY2023, an interesting trend was noticed in the remittances for deposits, purchase of immovable property, investment in equity/debt, gifts/donations, and travel.
    • Remittances under these heads constituted almost 70 per cent of the total, representing a year-on-year growth of 74 percent.
    • Foreign travel alone was almost Rs 1.1 trillion in FY2023, a three-fold increase from the pre-Covid period.
    • In all of these, payments made through credit cards are not reflected, as such payments were not subject to the LRS limit. This is an anomaly that needed to be fixed.
• The Differential Treatment Between Debit Cards and Credit Cards —
  • • It needed to be removed in the interest of uniformity and equity and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.
    • Payments by debit cards have been treated as LRS even earlier.
    • 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.
• Circumvention of System (Tax Evasion) —
  • • The system was circumvented in multiple ways, primarily by splitting payments in the name of multiple individuals–minors, household staff, etc.
    • Also, in many cases, the 5 per cent tax was absorbed as a cost and not claimed by filing a return.

What could be the possible impact?

• Complex Task for Banks —
  • • Transactions for purposes like education and medical expenses remain outside the purview of new amendment.
    • It will be a difficult task for banks to keep track of each transaction and maintain records of every card user.
• More Expensive Foreign Travel —
  • • The current move will make foreign travel 20% more expensive as this amount will be blocked till it is refunded in the income tax.
    • Taxpayers will be able to claim the “20% TCS” back at the time of Income Tax Return (ITR filing).
• Effect on Domestic Travel Agents —
  • • When TCS at 5 per cent on LRS remittances was first introduced in October 2020, it led to a significant loss of business for domestic travel and tour agents (DTAs).
    • Customers preferred overseas travel services with Global Travel Agents (GTAs).
    • GTAs have been escaping TCS compliance and hence can offer better pricing on their platforms.
    • Now that tax rate has been increased four-fold, travellers will prefer GTAs, as the upfront cost for travellers will increase while availing the services of DTAs.

Conclusion –

It is important to acknowledge the government’s genuine efforts in that direction in providing justice and ease of life for honest taxpayers. It is also equally important for honest taxpayers to join in and support the government in promoting a fair, easy, and compliant taxation system in the country.

Source – The Indian Express

QUESTION – What are the possible impacts of the government’s decision to bring foreign payments through credit cards within the purview of Liberalised Remittance Scheme (LRS)?