New TCS Rule: Sending money abroad to get costlier from October

By Archit Gupta

Starting October 1, 2023, the government is set to implement the new Tax Collected at Source (TCS) rules which were introduced earlier this year in the Budget. The new rules are part of the government’s efforts to enhance tax collection and broaden the tax base. Here, let us understand the key provisions of the new rules and their potential impact on businesses and individuals.

In one of the most significant and pivotal changes to the TCS landscape in India, the government is all set to ensure better transparency in matters of tax collection by extending the applicability of tax collection at sources. Historically, TCS was applicable on transactions involving sale of goods, but beginning 1st October, it will include a broad range of services, e-commerce, and foreign remittances in its ambit.

TCS is a mechanism through which the government ensures tax collection at source from certain categories of sellers. The sellers are required to collect taxes at a specified percentage if the total transaction value, i.e., sale consideration, exceeds the specified threshold and deposit tax with the government. Initially scheduled to roll out in July, the rules will be effective from October 1, 2023.

Now, let’s explore the areas impacted by the new TCS rules and their effect on businesses and individuals.

Budget Proposals

The Union Budget 2023 proposed an increased rate of TCS from 5% to 20% for all outward foreign remittances other than outward remittances for education and medical purposes. For education and medical expenses, a lower rate of 5% of the amount remitted over and above Rs 7 lakhs will continue to apply.

Key Impact Areas

Education: There will be no TCS on outward remittances for education up to Rs 7 lakhs. Any remittances above Rs 7 lakhs will attract TCS at a lower rate of 0.5% of the education is financed by a loan taken from a financial institution, and 5% if the remittances are without the aid of any loan.

Furthermore, the government has clarified that expenses for education apart from the travel tickets for commute between India and tuition fees will also include ancillary expenses such as food, accommodation, local transport and health services acquired by resident students while residing overseas.

Remittance for Medical Purpose: Outward remittances for medical purposes will attract TCS rate a 5% on spends above Rs 7 lakhs. No TCS on spends upto Rs 7 lakhs.

Overseas Tour Program Packages (OTPP): International travel plans will get costlier and as TCS on overseas tour packages will now attract a higher TCS rate of 20% instead of the erstwhile rate of 5% if the total spend is above INR 7 lakhs. However, the 5% rate will continue to prevail if the total cost of the package is under INR 7 lakhs.

It has been clarified by the government that purchase of international travel tickets and hotel bookings on a standalone basis will not qualify as OTPP.

Furthermore, rescinding the earlier, the government has also clarified that payments made overseas using one’s credit card will remain outside the purview of TCS for the time being. Other payment modes, like debit cards, cash and wire transfers will continue to attract TCS at the applicable rates.

Any Other remittance: any outward remittance made for purposes other than above, including but not limited to stock and real estate investment, shopping, etc, shall attract TCS at the rate of 20% on spends in excess of Rs 7 lakhs.

Impact on businesses and individuals

The proposed rules will significantly impact businesses and individuals. Businesses, including e-commerce platforms, will now have to revamp their current IT systems to incorporate a more robust TCS collection and reporting system, potentially leading to higher operating costs. Furthermore, the quarterly filing requirement instead of the existing annual filing will add on to additional compliance cost.

On the other hand, individuals will have to factor in the impact of TCS on their cashflows while planning foreign remittances and maintain proper documentation and records to prevent excess payment of taxes, especially in the case of multi-purpose remittances.

However, it is to be noted that, with proper supporting documents, TCS paid in excess of the total tax liability can be claimed as a refund at the time of filing the return of income.

Pro Tip

One can plan their outward remittances to minimize the TCS burden. For example, if a person has multiple outward remittances planned for the year for foreign travel, investment, education and or medical purposes, then the first spend can be towards transactions attracting a higher rate of TCS viz, travel and investment and thereafter, remittance can be made towards education and medical purposes which attract a lower rate of TCS.

Conclusion

The proposed changes to the TCS rules are poised to bring significant transformations to the taxation landscape in the country. This is in line with the government’s vision to curb tax evasion and bring out greater transparency. To navigate these changes successfully, businesses and individuals must proactively educate themselves, adapt their practices, and ensure strict compliance with the new rules to avoid penalties and legal consequences. Staying informed and seeking professional advice when needed will be key to managing the impact of these new TCS rules on financial operations.

(Author is Founder & CEO, Clear)