The Finance Ministry has clarified that the use of credit cards in India for purchasing products from global websites in foreign currency will be considered under the Liberalised Remittance Scheme (LRS). However, transactions above a certain threshold will attract Tax Collected at Source (TCS).
This clarification is important because the Finance Ministry had initially stated that transactions made through international credit cards while overseas would not be counted under LRS and would not be subject to TCS. However, the Ministry has now postponed the implementation of this decision to allow banks and card networks to develop the necessary IT solutions.
The Ministry provided two scenarios to explain the situation. In the first scenario, if a person is overseas and uses a credit card, it will not be considered under LRS and will not attract TCS. In the second scenario, if a person uses a credit card in India for permissible overseas transactions, it will be counted under LRS and will attract TCS if it exceeds ₹7 lakh in a year. The TCS rate will be 5%.
Apart from this change in implementation date, there are no other amendments proposed by the Finance Act 2023. For remittances up to ₹7 lakh under LRS, there will be no TCS. Beyond this threshold, TCS rates will be 0.5% (for education financed by a loan), 5% (for education/medical treatment), and 20% for other purposes.
The decision to defer the implementation of LRS-TCS timelines was made due to the unpreparedness of IT infrastructure to handle the new provisions. Banks and financial institutions had requested the government to postpone the implementation.
The increase in TCS rates for purposes other than education and medical treatment had raised concerns among taxpayers. The press release extends the timeline for implementation until September 30, 2023.
The clarification simplifies the TCS framework under LRS by restoring the previous limits of 0.5% for education financed by a loan beyond ₹7 lakh and 5% for medical treatment/education (other than financed by a loan). The increased TCS rate of 20% will apply from October 1, 2023, for other purposes and the purchase of overseas tour program packages beyond ₹7 lakh. The proposal to provide FAQs for clarification on practical difficulties is welcomed by taxpayers.