International Credit Card Spends To Attract Higher Tax From July 1 As Government Targets Evasion

International credit cards used to pay transactions abroad will attract tax collected at source of 20% from July 1 against the existing 5%.

The government withdrew rule 7 exemptions for international credit cards, which allowed these transactions to continue outside the liberalised remittance scheme, according to a gazette notification issued on Tuesday by the the Ministry of Finance. Under the scheme, resident Indians are allowed to spend up to $250,000 in foreign currency each financial year, without explicit permissions from the Reserve Bank of India.

The change has been made in light of ·instances wherein the LRS payments made by an individual are disproportionately high as compared to their disclosed incomes, the ministry stated in a clarification on Thursday.

Finance Minister Nirmala Sitharaman on Feb 1. had proposed raising the tax collected at source for international remittances to 20%, from the current 5%. The higher tax charges will apply to payments made toward transactions other than education and medical expenses.

While the new requirements will put higher cost on international transactions, it is expected to track any payments made through international credit cards from a foreign exchange management point of view.

"RBI had written to the government on more than one occasion, pointing to the need to remove this differential treatment," Ministry of Finance's statement noted.

For large, unreported transactions, this change will allow authorities to "catch the tail and get the fish out of it", Aseem Chawla, founder-ASC Legal said.

While the earlier TCS requirement was exempted—up to a limit—for credit card use on foreign visits, the change will extend the LRS requirement to both domestic use of credit cards for international payment and while on a visit, Chawla said.

Three private bankers, speaking the on condition of anonymity to express views candidly, said these norms may increase immediate compliance cost for lenders as they will be required to maintain details of payments and applicable tax for international credit cards separately.