News | Tax

New Rule Imposes 20% Tax on Overseas Credit Card Expenses for Indians

According to clarifications provided by the finance ministry regarding changes to the foreign exchange management rules published earlier this week, starting from July 1 Indians will be subject to a 20% tax collected at source (TCS) on their overseas credit card expenses, with the exception of costs associated with education or medical care. The recent amendment removes Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, thus placing credit card use overseas under the LRS. Such transactions will be subject to a TCS levy of 5% up until July 1 (with the exception of the healthcare and educational sectors), which will subsequently rise to 20%.
When the bill is paid in Indian rupees, the credit card companies will collect the tax, which can then be deducted from the cardholder's tax obligation when taxes are paid.
Professionals may use this credit to offset their quarterly advance tax liability, whereas salaried individuals may need to wait until they file their tax return. However, experts suggest that the new TCS requirement could cause cash flow issues for individuals traveling abroad. The inclusion of overseas credit card use within the purview of the Reserve Bank of India's liberalized remittance scheme (LRS) will be effective from May 16. TCS rates at the moment are between 0.5% and 5%.
The finance ministry has provided a set of clarifications regarding the enhanced TCS rates that will come into effect on July 1. As per the budget announcements, foreign remittances for tour packages and other foreign expenses (excluding education and health spending covered under LRS) would be subject to a 20% tax starting from July 1, up from the current 5% rate. Previously, credit card usage during foreign visits was not included in the LRS limit, but it is now covered. Debit card usage abroad has already been covered under LRS.
The ministry explained that this change was necessary to ensure uniformity and capture total expenditures under LRS, prevent bypassing of LRS limits, and manage foreign exchange prudently. The clarification also stated that lower TCS rates would apply for education or medical treatment-related visits. The rates would be 0.5% for education-related remittances funded by loans and 5% for those not funded by loans, both subject to a threshold of Rs7 lakh.
One relief for employees on overseas assignments is that expenses incurred during business visits will be treated outside LRS. However, the new TCS requirement for credit card transactions abroad may deter people from using credit cards and prompt them to explore alternative means to obtain foreign exchange.
Taxpayers will need to track TCS entries in their Form 26AS, and some individuals who spend on their employer's behalf may prefer alternative payment modes to avoid the direct TCS implication. The new TCS requirement has garnered significant attention on social media, with "20% TCS" trending as a popular topic.
As Indians use international credit cards for transactions abroad, they must now account for this additional financial obligation, which may increase the overall expenditure of their trips. However, travelers can claim TCS credit when filing their tax returns, minimizing the net impact on travel costs.
The government aims to make it easier to trace large-value international transactions through this change. The modified rules, however, do not apply to payments made for purchasing foreign goods or services from India. By collecting the tax at the time of the transaction, the government aims to discourage tax evasion and promote compliance.
The finance ministry has provided a list of frequently asked questions (FAQs) to address concerns about the inclusion of foreign spending using credit cards. Notably, a TCS of 5% will be levied on expenses exceeding Rs7 lakh for medical treatment and education, while other expenses such as real estate investment, foreign tours, and travel would attract 20%.



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Changes in Our Business Model
25th Sept 2020
Greetings from Moneylife Advisory Services
Between financial years 2019-21, SEBI has come up with extensive changes to investor advisor regulations. On Sep 23, 2020, SEBI had issued new additional guidelines. This comes just two months after extensive changes announced in July 2020. Earlier, in December 2019 there was an ad hoc circular
As a result of these changes, IAs, cannot accept fees through credit cards, will have to sign a 26-clause investor agreement, have to maintain physical record written & signed by client, telephone recording, emails, SMS messages and any other legally verifiable record for five years. IAs were already asked to record the suitability and rationale for every piece of advice given, sign them and store them for five years.
While these extensive and frequent changes, designed to strengthen the conduct of IAs are well-meaning, these have sharply increased compliance efforts and cost. We, being online advisors, find many of changes harder to implement, compared to advisors working in the physical space. We will have to have an army of advisors, administrative and tech staff to be compliant. If we do this, we will have to divert money to these areas and the cost of our service will double. We want to remain the least-cost service in the market to benefit more and more people. In the circumstances, we are forced to change our business model from “advisory” to “research”. This will mean the following:
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Debashis Basu