Impact of 20% TCS on international credit card transactions

On May 16, the ministry notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, to add payments made with international credit cards to the Liberalized Remittance Scheme (LRS). Starting from July 1, 2023, the TCS rate will be increased to 20%. Any transfer that exceeds 2.5 lakh USD, or its equivalent in another currency, needs RBI approval. This new rule will also be applicable to purchase of international flight tickets.

In this amendment, the Reserve Bank of India (RBI) has included international credit card payments under the LRS. The LRS allows Indian residents to remit up to $250,000 per year without prior approval from the RBI. However, this decision has raised concerns as it imposes an additional burden of 20% Tax Collected at Source (TCS) on overseas transactions. This move has generated significant discussion and debate, potentially hindering the formalization of the economy and impacting the ease of global travel.

Implications for Travelers and the Economy

The inclusion of international credit card payments under the LRS, accompanied by the 20% TCS burden, poses several challenges for individuals and businesses engaged in foreign travel. Firstly, this decision places an extra financial burden on travelers, as they will now have to allocate an additional 20% towards TCS, reducing their available cash flows. It also adds to the overall expenditure, potentially leading to inflated budgets for travel and related expenses.

Furthermore, this may discourage the shift towards digital payments and formalize the economy. By burdening international credit card transactions with TCS, the government risks pushing people back towards cash transactions, undermining the progress made in moving towards a cashless society. This amendment may hamper the seamless movement of people and international business transactions.

Compliance Burden and Administrative Challenges

Including international credit card payments under the LRS brings about a significant compliance burden and administrative challenges. The requirement for TCS collection on foreign transactions will result in increased paperwork and demands for refunds, adding to the complexities faced by individuals and businesses. The administrative overhead may outweigh any potential revenue boost for the government, as TCS is offset against an individual's tax liability.

Balancing Regulation and Facilitation

While tracking foreign exchange transactions under the LRS is important from a regulatory perspective, it is crucial to strike a balance between regulation and facilitation. Imposing a high TCS on international credit card payments may hinder the objective of encouraging digital payments. Instead, there should be a focus on promoting transparent financial systems, enhancing compliance mechanisms, and fostering ease of doing business.

Conclusion

The RBI's decision to include international credit card payments under the LRS, accompanied by the 20% TCS burden, has raised concerns about its impact on the economy and the ease of global travel. While the aim of tracking foreign transactions is important, it is crucial to evaluate the potential drawbacks and unintended consequences. Finding a middle ground that promotes transparency, facilitates the ease of international transactions, and encourages the improvement of the economy should be the objective. Also, it has been clarified that the new rules do not affect any changes in the use of international credit cards by residents while in India.