With the July 1 deadline for its controversial tax on international credit card spends looming, the government is still working on knotty issues to evolve a uniform reporting system, even as experts continued to emphasize that the tax itself is against the principle of the liberalised remittance regime and the government’s promise of ease of doing business.
The government’s plan is to charge up to 20% tax collection at source (TCS) for foreign remittances through credit cards under the liberalised remittance scheme (LRS) of the move. Experts have also pointed out that the move is also a round about way of reducing the overall LRS limit of $250,000 a year.
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The government will soon issue some clarifications on charging different TCS rates varying between 0.5% and 20% along with specific exemptions following which the Reserve Bank of India will develop a reporting framework for authorised dealers such as banks, two officials with direct knowledge of the matter said on condition of anonymity.
“Reporting framework can be developed quickly if the rules are simple,” one of them added, hinting at the proposed multiple TCS rate structure for various types of transactions.
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At least three experts, who did not wish to be named, said the government’s decision to bring in international credit cards under the $2,50,000 limit goes against the grain of LRS, and also runs counter to the medium-term objective of convertibility.
HT on May 20 wrote that the government’s move effectively reduced the LRS limit.
“If the idea is to reduce the amount Indians can spend or invest overseas in a year, or use to buy assets such as houses or stocks, then it is anti-reformist, and goes against the original reasons why LRS was introduced. If the idea is to crack down on untaxed income finding its way overseas — a cumbersome process given that even credit card spends are on the radar anyway — going after individual violators perhaps makes more sense than a sweeping rule change,” it pointed out.
The new Foreign Exchange Management (Current Account Transactions) Rules, which was notified last month on May 16, deleted a section that exempted credit card payments from the LRS. Thus, foreign remittances made through credit cards would also come under the LRS limit of $2,50,000 from July 1.
After the Reserve Bank of India (RBI) on May 16, issued amended rules to include usage of international credit cards under LRS in lines with debit cards, the finance ministry on May 18 issued a clarification, exempting business expenditure undertaken through credit cards “subject to verifying the bona fide of the transaction”.
On May 19, after more concerns were raised, the finance ministry issued a statement exempting transactions up to ₹7 lakh a year from the TCS requirement.
“To avoid any procedural ambiguity, it has been decided that any payments by an individual using their international debit or credit cards upto ₹7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS,” it said.
Even as the July 1 deadline kicks-in this week, banks are still awaiting specific clarifications regarding applicability of different TCS rates on various transactions undertaken through international credit card, one of the experts said.
“For example, how to differentiate between business transactions and personal expenses undertaken through the same credit card while spending abroad? “.
The LRS scheme, introduced in February, 2004, allows resident individuals to freely remit up to $2,50,000 per financial year for any permissible current or capital account transaction or a combination of both. Any person crossing this foreign remittance limit requires prior approval of Reserve Bank of India. The May 16 notification was issued to bring international credit cards into the LRS limit.
However, multiple TCS rates ranging from 0.5% to 20% for different types of transactions and exemptions — such as exclusion of an amount up to ₹7 lakh per annum from the LRS limit if spent using a credit or a debit card — require clarifications for the reporting purpose, experts said.
They pointed to several issues that still require clarification: How to get the 20% TCS amount reversed if the item purchased via credit card is returned? What TCS rate would be applicable for “travel and incidental expenses” related to education and medical treatment? “And what about the person accompanying the patient? How to distinguish travel and incidental expenses related to education, medical treatment and expenses by the help visiting along with the patient?,” one of the experts asked.