Payment made in dollar using card in India to attract TCS at 20%
Making online purchasesin India from companies located abroad where money is to be converted in any foreign currency will attract Tax Collected at Source (TCS) at 20 per cent. This will be due to the new changes in Foreign Exchange Management- Current Account Transaction (FEM CAT) Rules.
The Finance Ministry notified the changes on May 16 which removes the exemption given to the use of international credit cards for meeting his expenses by a person when he is abroad. Even earlier, all current account transactions undertaken on international credit cards in India were subject to Rule 5 of the FEM CAT Rules and covered under Liberalized Remittance Scheme (LRS). “The notification dated May 16 does not effect any changes in the use of international credit cards by residents while in India,” the Ministry said on Thursday.
At present, limit under LRS is $2,50,000 per year, per individual.
Later, a Ministry official explained that when a foreign company is offering price for goods or services in INR then it will not be treated as part of LRS. However, if the price is in foreign currency and the bank is doing the conversion of INR into foreign currency on behalf of the individual purchasing goods or services, then it will be treated as part of LRS and TCS will be applicable, he clarified.
The official also explained that every single dollar spend abroad using International Credit Card will attract TCS. Also, the transaction will be reflected in Annual Information Statement (AIS), prepared by the Income Tax Department.
Meanwhile, the Ministry said in a Frequently Asked Questions (FAQs), LRS will not cover business visits of employees. When an employee is being deputed by an entity for any of the above, and the expenses are borne by the latter, such expenses shall be treated as residual current account transactions outside LRS and may be permitted by the AD (Authorised Dealer) without any limit, subject to verifying the bona fide of the transaction.
Giving rationale about the change, the Ministry said that while on a visit abroad, a person could use international debit cards or other methods or international credit cards for undertaking current account transactions. Payments by debit cards etc. have been treated as LRS even earlier. Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits.
Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of $2,50,000. “The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of withdrawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits,” the Ministry said, while adding that RBI had written to the government on more than one occasion, pointing to the need to remove this differential treatment.
It also highlighted that under the LRS, in the financial year 2021-22, a total of $ 19.61 billion was remitted, up from $12.68 billion in 2020-21. In 2022-23, it rose to more than $24 billion, of which overseas travel accounted for more than half.
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