The Central government in a late night notification Tuesday (May 16) amended rules under the Foreign Exchange Management Act, bringing in international credit card spends outside India under the Liberalised Remittance Scheme (LRS). 

As a result of the move, the spending by international credit cards will also end up attracting a higher rate of Tax Collected at Source (TCS) at 20 per cent, effective July 1. This, the government said, has been done in consultation with the Reserve Bank of India. The move could likely end up having a significant compliance burden for card-issuing banks and for consumers. 

Transactions done using credit cards outside India are now under the ambit of the LRS with immediate effect, which enables the higher levy of TCS, as announced in the Budget for 2022-23, from July 1. 

Before this, the usage of an international credit card to make payments towards meeting expenses during a trip abroad was not covered under the LRS. The spending through international credit cards were excluded from LRS by way of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. With the latest notification, Rule 7 has now been omitted, paving the way for the inclusion of such spending under LRS. 

While one of the objectives of the move is to help track high-value overseas transactions, it has been clarified that the changes will not apply to the payments for the purchase of foreign goods/services from India such as subscription services for newspapers, magazines or online streaming services. “It is strictly for transactions under Schedule III (of the FEM rules) and not for payments for the purchase of foreign goods/services. This demand had come from the domestic travel industry,” a finance ministry official said. 

The move comes in the backdrop of a surge in spending on overseas travel. Indians spent $12.51 billion on overseas travel between April-February of fiscal 2022-23, a rise of 104 percent compared to the same period of the last year, albeit over a low base due to Covid-linked travel restrictions. 

According to the latest data released by the RBI, in April-February of FY2022, the total amount spent by domestic travellers on international destinations was $6.13 billion under the RBI’s LRS for resident individuals. 

During April-February 2022-23, transactions using credit cards, in overall volume terms, increased 32.6 percent to 267.35 crores. In value terms, spending by credit cards increased nearly 50 percent to Rs 12.95 lakh crore during April-February 2022-23. 

The measures for credit cards follow the government’s earlier steps to introduce a TCS levy for overseas tour packages. In February 2020, the government in the Budget announced the insertion of a new clause under Section 206C of the Income-tax Act to levy 5 percent TCS on overseas remittances and for the sale of overseas tour packages. It became applicable in October 2020. 

Technically, a TCS levy of 5 percent will come into effect on such transactions till July 1 (except for medical and education-linked sectors), which would then increase to 20 percent after July 1. However, industry players said the mechanism to levy TCS on overseas credit card spending has not been made functional as of now. 

Image Source: Travelobiz