Recently, the Government of India released a notification and mentioned that a 20% tax will be levied as TCS on international usage of credit cards. As per the notification, usage of international credit cards will be included under the Liberalised Remittance Scheme (LRS).
It was cleared by the Finance Ministry in the notification that Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, will include international credit card payments in accordance with the LRS.
Latest Update
30th June 2023
- All LRS purposes and overseas travel packages are exempt from TCS rate changes, regardless of the mode of payment, for amounts up to Rs. 7 lacks per individual per year. Read more
The Foreign Exchange Management Act (FEMA) of 1999, which outlines the rules for outbound remittances from India, also makes the LRS its part. It should be mentioned that all resident Indians are permitted to send up to $250,000 per fiscal year freely and without informing the Reserve Bank of India.
Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 has been excluded, outlined in the new notification. As a result, using an international credit card to pay for travel expenses outside of India is now under the LRS.
Analysis of TCS (Tax Collection at Source)
According to the Income Tax Department, the TCS is an additional amount levied as tax by the seller of particular goods from the buyer during the sale over and above the sale amount and is remitted to the government account.
As per the system, the person making the payment for particular goods or services is required to collect tax from the recipient of the payment and remit it to the government.
Relevant: All About TCS Provisions of Section 206C(1H) with Applicability
The main objective behind bringing the TCS system is to widen the tax base, prevent tax evasion, and make sure that the tax collection process is smooth. All in all, it streamlines the process of tax collection by shifting the responsibility from the government to the person making the payment.
What is the Process of TCS?
In India, the Income Tax Act, of 1961 governs TCS regulations. These rules identify particular items or services for which the recipient is required to pay tax at the moment of acquisition. The payer is responsible for gathering the necessary tax and depositing it with the government.
A Tax Collection Account Number (TAN) must be obtained, and the person collecting tax at source must submit regular returns to the tax authorities. Depending on the nature of the goods or services, different tax rates and compliance procedures apply.
Difference B/W TDS and TCS
TCS (Tax Collected at Source) and Tax Deducted at Source (TDS) are two separate ideas of tax collection that must be understood. TCS entails collecting tax from the recipient at the time of payment, whereas TDS entails deducting a percentage of the payment made to the recipient and remitting it to the government.
Tax authorities employ both TCS and TDS to collect taxes, although there are differences in their applicability and the point at which tax is collected. TDS applies to a broader variety of payments made to different categories of beneficiaries, whereas TCS is only relevant to specific goods or services as determined by tax authorities.
At the moment of purchase or payment under TCS, the person paying for the goods or services collects the tax from the recipient. On the other hand, with the TDS system, the payer is the one who deducts the tax from the recipient’s income or payment.
In TCS, the payment maker is responsible for collecting tax from the recipient and remitting it to the government. In the TDS system, the person who makes the payment is responsible for deducting and remitting the recipient’s tax to the government.
In TCS and TDS, the rates and criteria are very different. The nature of the goods or services may affect the tax rates for TCS, whereas the form of payment and the position of the recipient may affect the tax rates for TDS.
Both the TCS and TDS have important reporting and compliance responsibilities. A Tax Collection Account Number (TAN) must be obtained and regular returns must be filed by the individual collecting tax under TCS. A Tax Deduction Account Number (TAN) and regular TDS returns are required of the person deducting tax under TDS.
Applicability of TCS Under LRS
TCS is applicable to particular foreign remittances made by individuals, under the Liberalised Remittance Scheme (LRS). The LRS permits residents to freely transfer up to a specific amount of money outside for various acceptable expenses, including gifts, investments, travel, and education.
TCS could be applicable to the amount being remitted when an individual uses the LRS to send money abroad. Before this year’s budget, remittances over Rs 7 lakh in a fiscal year were liable to a TCS rate of 5%. The TCS rate was raised to 20% under LRS in the Union Budget 2023, except for educational and medical expenses, where the previous rates will still be in effect.
The authorised dealer (bank or financial institution) through which the transfer is sent is in charge of collecting TCS. The TCS is obtained from the sender of the remittance by the authorised dealer, who then deposits it with the appropriate authorities.
It’s vital to remember that not all foreign remittances are covered by TCS under the LRS. The TCS does not apply to some categories, including payments for imports, transactions made as part of the government’s overseas aid initiatives, and remittances made by specific exempt businesses.
What is Method to Claim TCS Refund?
People who paid TCS after the LRS are qualified to obtain a tax credit when they file their income tax return. The TCS amount paid may be deducted from the person’s overall tax burden.
It does make sense to go through the relevant provisions of the Income Tax Act, 1961, and expect the direction of tax professionals or authorised dealers to understand the specific rules and implications of TCS under the Liberalised Remittance Scheme in India.
RBI is categorized authorised person as Full fledged money changers(ffmc’s), Authorised dealers II, Authorised dealers/ banks.
Authorised dealers can undertake current and capital account Remittance under LRS.
AD II dealers can undertake non- trade current account Remittance under LRS.
FFMC have no authorization to effect Remittance under LRS. They can carry out Money exchange activities alone( selling physical foreign currency & release forex prepaid cards) under LRS.
No clarity on TCS applicability on physical currency release.
As per RBI, Release of foreign exchange notes and Remittance are different but both ambit of LRS.
Finance bill imposed TCS on Remittance under LRS and no clarity on TCS applicability on release of foreign exchange under LRS.