The Reserve Bank of India allows all resident individuals to use up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction. This limit is prescribed in Liberalised Remittance Scheme or LRS. An individual can use the LRS limit for any foreign remittance, like travelling abroad, purchasing goods, paying for services, education, medical treatment, etc.
The recent statistics shed light on a notable trend in utilising the LRS limit, revealing that a significant portion of outward remittances goes into foreign travel. In the fiscal year 2022-23, between April and February, Indians expended a staggering $12.51 billion on overseas travel, accounting for approximately 52% of the total outward remittances authorised under the LRS. Furthermore, when comparing inbound and outbound tourism, 4.1 million Indian tourists visiting foreign destinations in January and February 2023 combined, while only 1.7 million foreign tourists explored India during the same period. These figures indicate that we spend more than we earn from the tourism sector.
The revenge trips – a phrase expressing the frustration and disappointment stemming from the cancellation of our vacations due to the impact of the COVID-19 pandemic – have possibly led to the imposition of a 20% TCS on foreign remittances. The TCS was announced in the Budget 2023, but the current buzz is due to the changes announced by the government on the use of international credit cards (ICCs) for individuals travelling abroad.
Also Read: TCS on Credit Card calculation: How much extra will you have to pay on an international trip?
Before the recent change, any foreign currency used during the overseas trip was not considered under the LRS limit of USD 2,50,000 if it was spent using the ICC. That means the remittance limit was not reduced by the amount spent using the credit card, and consequently, no tax was required to be collected by the credit card issuer.
The government has now changed the rule. As per the announcement, any overseas spending in foreign currency by an individual using international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits. Thus, the relaxation from TCS has been given only for overseas spending using International Debit or Credit Cards if the threshold limit of Rs 7 lakh per financial year is not breached. This relaxation may not be available for any remittances made from India. Any remittance from India for overseas investment, ticket booking, purchase of goods, payment of subscription fees, etc., should be subject to TCS at 20%.
Effective from July 1 2023, a 20% TCS will apply to every foreign remittance under LRS except for medical and educational purposes, wherein 5% TCS will apply on breaching the threshold of Rs 7 lakh in a year. Your bank or credit card/debit card issuer will start charging 20% TCS on all transactions which exceed the threshold limit of Rs 7 lakh per financial and the payment for which has been made in foreign currency. Booking flight tickets, paying for subscriptions on foreign websites like ChatGPT, buying goods from foreign e-commerce websites, etc. will cause a higher outflow of funds.
The TCS is not your tax expense but a sort of advance payment of tax to the Government, for which you can claim a refund by filing a return of income. However, you would not get the interest from the date of TCS but from 1st April of next year till the date of payment. The interest is paid at 6% per annum if the refund is more than 10% of your tax liability.
The 20% TCS on credit card/debit card spending abroad poses challenges for the issuing banks. It will increase the compliance burden on banks and higher NPAs if the tax amount is not collected. The individuals will face financial inconveniences due to the blockage of funds and cancelled transactions.
This measure aims to monitor and curb high-value overseas transactions, especially through credit cards. It will help India conserve the forex reserve, rein in money laundering activities, increase tax collection and more income-tax return filing. If you do not file the return of income and the TCS from such remittances is Rs 50,000 or more, all your incomes in subsequent years will be subject to higher TDS or TCS with a minimum rate of 20%.
(By CA Naveen Wadhwa, DGM, Taxmann, and CS Tamanna Gabba, Taxmann. Views are personal.)