Money
Tax on foreign card spends: A bolt from the blue
Summary
Tax Collected at Source or TCS is similar to tax deducted at source in the sense that it is a tax deduction by a third party on your behalfThe government has brought credit cards under the Liberalised Remittance Scheme (LRS) from 1 July. Even a dollar of foreign spending will attract a 20% tax — a departure from the current 5% tax on spending of over ₹7 lakh (credit cards excluded). Mint explains:
What is this tax on foreign spending?
Tax Collected at Source or TCS is similar to tax deducted at source in the sense that it is a tax deduction by a third party on your behalf. It was introduced in Budget 2020 on payments under the LRS — i.e investments in foreign countries. However TCS is not a tax, it is just collection of tax. For example, if you spend $100 for booking a hotel stay, a TCS of $20 will be deducted by your card provider. The rupee equivalent of this TCS ( ₹1,648) will be available for you to adjust against any advance tax you have to pay in the course of the year. In case no such tax is due, you can claim a refund at the end of the year.
What exactly does the tax apply to?
When TCS was initially imposed in the 2020 Budget, it was limited in nature. It applied only to payments under the LRS exceeding ₹7 lakh per year. Credit cards were left out of the purview of the LRS. However in the 2023 Budget, the minimum threshold was abolished. Plus, a recent amendment to the LRS rule has removed the credit card exception. It will also apply whether you spend it through a debit card, forex card etc. But it may not affect purchase of foreign goods or services via a credit card while you are in India such as subscription to music etc.
How do I claim it back?
The TCS will reflect in Form 26 AS every quarter when the bank files the TCS returns. You can adjust it against advance tax you are liable to pay. For salaried individuals whose tax is fully deducted by their employer, there may not be any advance tax due. In such a case, you can claim a refund while filing your returns. However, you lose out on the interest you would have earned on this amount.
Can there be practical difficulties?
Yes. Spending on a corporate credit card for business purposes is technically spending on the ‘current account’ and should not fall under LRS. Hence, TCS should not be deducted on this . The finance ministry also supported this position in a tweet on 18 May by giving the example of an employee on a business trip —which would not come under LRS. However, it is not clear how banks will be able to distinguish business expenses from personal expenses made by an employee using a corporate credit card.
What about foreign education?
Remittances for education (and medical treatment) will attract a lower TCS of 5% (for education loans it is 0.5%). They also have a threshold of ₹7 lakh. There are doubts about expenses such as maintenance of the student (day-to-day expenses), transport and off-campus accommodation. However, the finance ministry clarified that such incidental expenses will also attract the lower TCS rate of 5%. Nonetheless proving that an expense is incidental to a bank may be a challenge.
