The government, on May 19, blinked on its plan to levy a 20% tax on overseas credit card spending from July 1, in the face of a furore from taxpayers as well as businesses, and decided to exempt any payments by an individual using their international debit or credit cards up to ₹7 lakh per financial year from the levy.
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In a statement, the Finance Ministry said this is being done to remove “any procedural ambiguity” as “concerns have been raised about the applicability of Tax Collection at Source (TCS) to small transactions under the Liberalized Remittance Scheme (LRS) from July 1, 2023.”
Earlier this week, the Reserve Bank of India introduced a new provision to capture overseas credit card spends under the LRS, which permits forex remittances of $2.5 lakhs a year for individuals.
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The government had separately notified that such overseas spending will also attract a 20% Tax to be collected at source, with a provision to adjust such levies against advance tax payments or seek a refund at the time of filing annual tax returns.
Reacting to sharp criticism from the move, the ministry had issued an elaborate explanation on Thursday with the rationale for the tax levies, and said the move will primarily impact only tour travel packages, gifts to non-residents and domestic high net-worth individuals investing in assets such as real estate, bonds, stocks outside India. “Instances have come to notice where the LRS payments are disproportionately high when compared to the disclosed incomes,” it had reasoned.
On May 19, however, it backtracked partially and said spends upto ₹7 lakh a year will neither come under the LRS nor attract TCS. The necessary changes to the Rules (Foreign Exchange Management (Current Account Transactions Rules), 2000) will be issued separately to facilitate the ₹7 lakh exemption announced.
“Existing beneficial TCS treatment for education and health payments will also continue,” the ministry said. Such payments up to ₹7 lakh a year are permitted with a TCS rate of 5%.