What is 20% TCS On Credit Cards? How Will It Impact Foreign Trips of Indians?

Since 16th may 2023, there is too much buzz about TCS and LRS on Twitter and Social Media. A lot of Leaders and CEO have given their response to this new TCS rule.

Let's understand what is TCS , LRS and FEMA.

Tax Collection at Source (TCS) :

Tax collected at source (TCS) is the tax collected by the seller directly from the buyer on the time of sale itself and seller will deposit this amount to Tax Authorities.

Example:

1. Suppose TCS is 20%. 
2. If Rohan has a Credit Card and he buys his Mobile worth 1,00,000 INR from his Credit Card.
3. Here Rohan is buyer and Credit Card company is seller.
4. Credit Card (seller) will charge extra 20% TCS from Rohan (buyer) and his total Credit Card bill will be 1,20,000 INR (1,00,000 + 20,000).
5. This extra 20% TCS money will be directly paid to Indian Tax Authorities by Credit Card company.

Foreign Exchange Management Act (FEMA) : 

1. This Act was passed in 1999.
2. This defines all the rules and regulation about how citizens can use or transfer Indian money outside.

What is Liberalized Remittance Scheme (LRS)?

1. LRS is a specific part of Foreign Exchange Management Act (FEMA).
2. LRS makes guideline for outward remittance from India by Indian Citizens.
3. LRS defines how much maximum money can be remitted overseas by any Indian Citizens Per Year without informing the Reserve Bank of India.
4. Remittance done to overseas for Education and Medical purposes doesn't come under this Rule.
5. TCS of 5% will be charged from customer on the Transaction Amount on Debit or Forex Card for overseas Transactions.
6. If anyone wants to remit money overseas which is more than LRS Amount Per Year, he has to take prior permission from Reserve Bank of India.

History of LRS : 

1. In 1999, under LRS, every citizen was allowed to remit money overseas up to a maximum of $25,000 Per Year without informing the Reserve Bank of India.
2. In 2007, LRS was increased to $50,000 Per Year.
3. In 2013, LRS was increased to $2,50,000 (2 Crore Rupees) Per Year.

Who are eligible for LRS?

1. Person must be an Indian resident as defined under the Foreign Exchange Management Act (FEMA). 
2. He must have a valid Passport, PAN card and Bank Account in India.

Benefits of LRS :

1. A person can invest or transfer money up to a maximum of $250,000 (2 Crore Rupees) Per Year to overseas without informing the Reserve Bank of India.
2. LRS also allows Indians to transfer money from India to any foreign country up to a maximum of $250,000 (2 Crore Rupees) Per Year without informing the Reserve Bank of India.

Why LRS required?

1. LRS is used to put some Taxes on rich person who are transferring Indian money to overseas.
2. If LRS is not implemented, people will earn money in India and they will simple transfer that money to some other country where Tax is very less or no Tax.
3. So, in case someone wants to evade Taxes in India and transfers upto maximum of $250,000 (2 Crore Rupees) Per Year to overseas, he first have to pay 20% TCS on total amount.  

Example: 

1. If Rohan visits Singapore and uses his Debit or Forex Card for overseas Transactions, he has to 5% TCS on the Transaction Amount.
2. Rohan can use or transfer up to a maximum of $250,000 (2 Crore Rupees) Per Year to overseas without informing the Reserve Bank of India.
3. If Rohan wants to remit money overseas which is more than $250,000 (2 Crore Rupees) Per Year, he has to take prior permission from Reserve Bank of India.

Liberalized Remittance Scheme (LRS) Amendment 2023:

1. Indian government have amended Foreign Exchange Management Act (FEMA) on 16th May 2023.
2. Credit Card or International Credit Card has been added under Liberalized Remittance Scheme (LRS).
3. TCS rate has been increased from the current 5% to 20% effective from July 1, 2023.

Example:

So Basically if Rohan visits Singapore and uses his Debit or Forex Card or Credit Card in Singapore, 20% TCS will be charged on all his overseas Transactions.

If he buys a Forex Card and loads USD in this Forex Card, still he has to pay 20% TCS will be charged on this amount.

Rohan visits Singapore and he has a Credit Card with limit of Rs 10,00,000. 

He uses his Credit Card to pay for all transactions in Singapore like Hotels Bills, Shopping, Food and Travelling.

If he spends total 4,00,000 Rupees in Singapore from his Credit Card, Credit Card company will charge 20% TCS from his Credit Card and his total Credit Card statement will be 4,80,000.

Total Spend : 400,000 INR

20% TCS Charged : 80,000 INR

Total Credit Card Bill : 4,80,000 INR

Impact of Liberalized Remittance Scheme (LRS) Amendment:

The TCS increase will impact overseas tours and travel packages and increase the cash outflow immediately for travelers. 

The tour operators now will have to collect 20% TCS of the total cost of overseas tour package from the travelers.