The Government of India has recently introduced a significant amendment to its regulations concerning credit card usage on international travel. Under the revised rules, a Tax Collected at Source (TCS) of 20% will be imposed on international credit card expenditures outside of India above Rs. 7 lacs, except for transactions related to medical and educational purposes. This decision brings credit cards on a level playing field with other forms of payment made used to book overseas travel under the broader Liberalised Remittance Scheme (LRS).
Starting from July 1, 2023, all spending on international credit cards will fall under the purview of the LRS, attracting a 20% TCS instead of the previous rate of 5% for remittances exceeding INR 700,000. This TCS, which is payable by the individual sending money abroad, will be applied to all credit card expenditures outside India, excluding those associated with medical treatment or education.
The introduction of this amendment has raised concerns among many Indian travelers, as it will increase their initial cash outflow even though this is not an additional cost. While the government has implemented technology to process faster tax refunds in the last couple of years, there is still a lot that can be improved to simplify the compliance burden for all stakeholders involved including card-issuing banks, cardholders, and travel businesses.
In general, while using credit cards for overseas travel customers may face many issues. One significant concern is the high foreign currency transaction fee imposed by most banks, ranging from 2% to 3.5% of the transaction amount. Another consideration is the dynamic currency conversion (DCC) fee, which entails additional charges when overseas merchants offer to convert the transaction amount into the traveller’s home currency at an inflated exchange rate. To avoid these extra expenses, travellers should always opt to be charged in the local currency rather than their home currency.
Additionally, credit card fraud remains a possibility while traveling abroad. Travelers should exercise caution when using their credit cards in public places or engaging in online transactions. It is advisable to use credit cards equipped with chip and PIN features and to notify the bank of any travel plans to prevent unauthorized transactions.
The increased tax collected at source may pose challenges, but it serves as a step towards fostering transparency and accountability within the system. Notably, the 20% TCS can only be claimed during the filing of the Income Tax Return (ITR). A Large number of credit card holders in India are salaried employees and small business owners. Given that India follows a system where tax is paid based on self-assessment, this move will nudge taxpayers to follow a more careful reporting of their incomes and greater tax revenue for the government.
Potential higher tax revenue leading to more investment in nation-building along with lower cash outflow in international trips, combined can give a thrust to domestic tourism. A spike in domestic tourism can have a multiplier effect on India’s economy in the long run.
In conclusion, the Indian government’s decision to include international credit card spending under the LRS and to levy a higher TCS is primarily aimed at combating tax evasion and promoting greater accountability among taxpayers. Although this may present challenges for affluent individuals seeking significant expenditures abroad, it represents a step towards fostering transparency among the citizens and eventually contributes to building a flourishing tourism infrastructure within India.
By Chirag Agrawal, Co-Founder, TravClan
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