International Credit Card Spends Under LRS Delivers A Double Blow To Users
It will have to be claimed after the end of the financial year when you file your tax returns.
In a move that will increase the compliance impact as well as lock up additional amounts of money for credit card users, the government has scrapped Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules 2000.
This will impact the use of credit cards in foreign currencies and will lead to a 20% tax collection at source starting July 1, 2023, which means that additional money will get cut for such transactions. The important thing is that there is no relief even for small transactions, as every use will be covered.
Here is a detailed look at the matter and how it will impact credit card users.
What Is Rule 7
Rule 7 of the Foreign Exchange Management ( Current Account Transactions) Rules 2000 was a rule introduced more than two decades ago as a measure to liberalise the usage of credit cards in foreign currencies. It excluded the use of global credit cards for payments abroad from the Liberalised Remittance Scheme. The LRS allows for spending up to $250,000 per person abroad for various purposes, including education, medical treatment, and even investments.
The rule excluded global credit card usage from this $250,000 limit, so it was not to be counted in the calculations, but with the change, this would have to be included when the annual figure is arrived at.
The impact of these expenses, which are often not very large, coming under the LRS is one thing, but there is a consequent impact that will be significant. The overall LRS limit is quite significant at $250,000 per person, but what will bite from July 1 is the impact of TCS, as this will be felt on every transaction. In the Union Budget that was presented earlier this year, there was a change in the TCS rules.
Currently, TCS on transactions that are not related to education or medical expenses is at the rate of 5%, and that too only when the transactions in a year exceed Rs 7 lakh. From July 1, the TCS rate has gone up to 20%, and that too without any threshold limit, which means that the TCS will start from the first expense itself.
What Does This Mean For You
As a normal individual, there will be two impacts of the change in this rule for credit cards that will be felt after July 1, 2023.
One is when you are in India but are using the facility of international spending on your credit card on foreign websites or in foreign currency. This happens a lot of times when there is some shopping done or a subscription bought. The moment you do this, the 20% TCS will kick in, even for small amounts, because this is applicable without any limit. The second aspect is when you are abroad and then use a credit card. Here too, the 20% TCS will be implemented for each transaction. In simple words, your spend or expense just went up by 20% when you spent abroad or in foreign currency. As a planning measure, you will have to allocate more money for your foreign spending because the TCS will occur along with it.
Can The Money Be Recovered
The amount that is deducted here will be reflected against your permanent account number in the records of the Income Tax department. This means that you can use the amount as if you had paid advance tax and then set it off against the tax liability that you have. Just like other taxes deducted at source are considered a credit for the tax paid while calculating the tax liability, the TCS will also work the same way. So one should not forget to adjust this while filing the tax return. However, if this is an extra amount and it exceeds your tax liability, then you can claim a refund.
The only thing is that it will have to be claimed after the end of the financial year when you file your tax returns. This means a long wait for the refund.
Arnav Pandya is Founder - Moneyeduschool