Clarity on TCS: Is this the right choice?
The Finance Ministry has provided much-needed clarification regarding the applicability of Tax Collection at Source (TCS) on overseas spending through debit and credit cards. In an announcement made on the 19th of May, the government stated that no TCS would be deducted for transactions up to INR 7 lakh. This decision aims to address concerns raised about small transactions under the Liberalised Remittance Scheme (LRS) and alleviate the backlash against the previous decision to levy TCS on all spending. Let’s delve deeper into the details.
1. No TCS on Overseas Spending of up to INR 7 Lakh
The government’s recent announcement brings relief to individuals making overseas payments using debit or credit cards. As per the clarification, no tax will be charged on spending up to INR 7 lakh in a year. Previously, credit card spending overseas was subjected to a 20 per cent tax starting from July 1, which had drawn criticism and was dubbed as “tax terrorism.” However, this clarification ensures that payments up to INR 7 lakh will not attract any TCS.
2. Exemption for Education and Medical Expenses
The Finance Ministry’s clarification extends the exemption for education and medical expenses under the TCS regime. Currently, overseas medical treatment and education expenses up to INR 7 lakh per year are exempt from TCS. Expenses exceeding this limit are subject to a 5 per cent levy, while those who have availed of education loans are subject to a 0.5 per cent TCS. This beneficial treatment for education and health payments will continue as per the ministry’s statement.
3. Impact on Different Travel Scenarios
The exclusion of individual payments using international debit or credit cards up to INR 7 lakh per financial year from the LRS-TCS limits brings relief to family and leisure travellers. However, frequent business travellers may still find the spending threshold of 7 lakhs to be low. They may hope for a higher exemption limit, particularly when expenses are borne by their employers. Nevertheless, the base protection from TCS for business travellers exists if expenses are covered by the employer.
4. India’s Unique Tax Collection Approach
Tax experts have noted that India stands alone in seeking an upfront tax on all expenditures made during overseas trips. The 20 per cent TCS rate has been considered too high, and this approach could negatively impact foreign tourism. Other major countries like the US, UK, Singapore, Germany, and Japan do not have similar requirements for tax collection or withholding on credit card spending. It is crucial to understand that TCS is not an additional tax expense but rather an advance payment of tax to the government. Individuals can claim a refund by filing their annual income tax return, where all known sources of income have been taxed.
5. Refund Process and Interest Considerations
When claiming a refund of TCS, it is important to note that interest will accrue from the 1st of April of the following year until the date of payment, not from the date of the TCS deduction. If the refund exceeds 10 per cent of the individual’s tax liability, the interest paid will be at a rate of 6 per cent per annum.
The Finance Ministry’s clarification regarding TCS on overseas spending provides much-needed respite for individuals using debit and credit cards. The decision to exclude payments up to INR 7 lakh from the TCS ambit will ease the burden on travellers and mitigate concerns about small transactions under the LRS. However, the 7 lakh spend threshold may still be considered low for frequent business travellers. It remains to be seen whether further revisions will be made to accommodate their needs.
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