What is TCS for overseas expenses?

In a move that could impact millions of credit card holders in India, the tax department is considering a proposal that would require them to file a declaration with their banks specifying the nature of expenses incurred in foreign currency. The declaration would be used to determine whether the expenses are subject to a 20% tax collection at source (TCS) levy.

The TCS levy was introduced in May 2023 as part of a broader set of changes to the Foreign Exchange Management Act (FEMA). The levy applies to all payments made in foreign currency using credit cards, debit cards, or other payment instruments. However, there is an exemption for payments up to ₹7 lakh per financial year.

The finance ministry has announced in June that it will make appropriate changes in response to feedback and suggestions and move the implementation from 1st October 2023 instead of originally planned date of 1st July 2023. Notably, the rate of TCS will remain unchanged for all purposes under the Liberalized Remittance Scheme LRS and for overseas travel tour packages, irrespective of the payment mode, for amounts up to Rs. 7 lakh per individual per annum. Additionally, the implementation of revised TCS rates and the inclusion of credit card payments in LRS will be given more time. 

For overseas expenses on credit cards exceeding Rs. 7 lakh, a TCS of 20% will be applicable. However, if these expenses are incurred for medical or educational purposes, the TCS rate will be reduced to 5%. Furthermore, individuals availing loans for overseas education will be subject to a lower TCS rate of 0.5% above the Rs. 7-lakh threshold.

What is TCS Declaration?

The tax department is proposing a declaration requirement because it wants to ensure that the TCS levy is being applied correctly. The declaration would help to distinguish between expenses that are subject to the 20% TCS levy and those that are exempt.

Example: Expenses for medical treatment or education would be exempt from the TCS levy. However, expenses for travel, shopping, or other non-essential items would be subject to the levy.

The declaration would also help to prevent tax evasion. If credit card holders fail to declare their overseas expenses, they could be liable for penalties.

The tax department is expected to issue more details about the declaration requirement in the coming months. However, it is clear that the proposal is likely to have a significant impact on credit card holders in India. Read below to know more about the impact.

Impact on Credit Card Holders

The TCS declaration requirement could have a number of different impacts on credit card holders in India. Some of the potential impacts include:

Increased compliance burden: Credit card holders would have to keep track of their overseas spending and provide documentation to their banks to support their claims. This could be a burden for some cardholders, especially those who make frequent overseas purchases.

Higher costs: The TCS levy would add an additional cost to overseas spending. This could make it more expensive to travel, shop, or study abroad.

Increased enforcement: The declaration requirement could lead to increased enforcement of the TCS levy. This could mean that more credit card holders are audited and that those who fail to declare their overseas expenses are penalized.

Conclusion

The TCS rule is a new development that can significant impact on credit card holders in India. The declaration requirement will play a major role in ensuring that the amount that is legitimately exempt from tax is given due credit. The proposal is still in the early stages, but it is planned to be implemented by 1st Oct 2023. Credit card holders should be aware of the proposal and prepare for the potential impacts.

FAQs on TCS rule

1. What is the TCS declaration requirement?

The TCS declaration requirement is a proposal by the tax department that would require credit card holders in India to file a declaration with their banks specifying the nature of expenses incurred in foreign currency. The declaration would be used to determine whether the expenses are subject to a 20% tax collection at source (TCS) levy.

2. Who is affected by the TCS declaration requirement?

The TCS declaration requirement would affect all credit card holders in India who make payments in foreign currency. This includes payments for travel, shopping, education, medical treatment, and other expenses.

3. What are the exemptions from the TCS declaration requirement?

There are two exemptions from the TCS declaration requirement:

  • Payments up to ₹7 lakh per financial year are exempt from the TCS levy.
  • Expenses for medical treatment or education are exempt from the TCS levy, regardless of the amount.

4. What are the penalties for failing to declare overseas expenses?

If you fail to declare your overseas expenses, you could be liable for penalties. The penalties could include a fine of up to ₹2 lakh, or imprisonment for up to six months, or both.

5. What can I do to prepare for the TCS declaration requirement?

If you are a credit card holder in India, there are a few things you can do to prepare for the TCS declaration requirement. These include:

  • Start tracking your overseas spending – track amounts spent on different heads.
  • Gather bills and documentation to support your claims.
  • Be aware of the penalties for failing to declare your overseas expenses.

6. Where can I get more information about the TCS declaration requirement?

The tax department has not yet released any official information about the TCS declaration requirement. However, you can stay up to date on the latest developments by following the news and by checking the websites of the tax department and the Reserve Bank of India.