Taxpayers heave a sigh of relief as overseas spending on credit cards won't attract tax

The government has reversed tax collected at source (TCS) on credit card spends in excess of Rs700,000 Image: Shutterstock
 
Reversing its earlier decision, the government decided not to include overseas spending through credit cards under the Liberalized Remittance Scheme (LRS). The late Wednesday press release supersedes an earlier decision that experts said would be difficult to implement.

In addition to the reversal on credit card spends in excess of Rs700,000 per year attracting tax collected at source (TCS), the press release also delayed the implementation of the increase in the collected amount. The revised rate of 20 percent for tax collected at source will now be applicable from October 1.

The decision caps a month-long flip-flop where a hastily worded gazette notification on May 19 had announced that the revised rate of 20 percent for TCS would be enforced from July 1. This had largely been expected as the change had been made in the Finance Act 2023 with the date on which the amendments would take effect to be notified.

When the notification came, it included a clause stating that credit card spends would be included under LRS. As per that scheme, any overseas payments (except those for educational and medical purposes) would attract an enhanced tax collected at source of 20 percent. After protests and outrage on social media, the government decided to put in place an exemption of Rs7 lakh per person per year for payments made overseas.

Still, as the July 1 deadline approached, credit card companies complained that there was no clarity on how this would be enforced. There exists no mechanism to track spends across multiple cards. A user could easily exceed the Rs7 lakh allowance across multiple cards without his or her company knowing.

“One way to have done this could have been through a self-declaration,” says Gopal Bohra, partner direct tax at NA Shah Associates. This would be subject to further scrutiny later as there exists no mechanism to enforce the spend limit otherwise.

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This was also a problem that the government recognised and in its press release did away with the credit card limit after which TCS would be deducted. It also went a step further and removed overseas credit card spends from the LRS limit.

“The government has recognised the rigours of TCS both for credit card companies and taxpayers at large. The relaxation by way of threshold of Rs700,000 should provide necessary relief,” says Amit Singhania, partner at Shardul Amarchand Mangaldas and Co.

Other provisions of the notification stay the same and overseas tour package spends in excess of Rs700,000 a year would attract TCS at 20 percent. Lower levels for education and medical expenses continue.  

What remains to be seen is whether the government has kicked the can down the road and plans to reimpose these limits once card companies put in the infrastructure in place to track spending overseas or whether this is a permanent relaxation. For now, taxpayers will heave a sigh of relief as for those with a limited tax liability, this was akin to giving a free loan to the government.