The newly imposed Tax Collection at Source (TCS) Rate on foreign transfers is scheduled to be applicable starting from October 1, 2023. After a three-month delay, the revised TCS rates on payments made under the Liberalised Remittance Scheme (LRS) have been increased from 5 percent to 20 percent. This will be implemented on credit card expenses exceeding Rs 7 Lakh made overseas.

However, if such expenses are for medical or educational purposes, the TCS will be charged at the previous rate of 5 percent. Nonetheless, the government has deferred the implementation of TCS on International Credit Cards used abroad.

What Is RBI’s Liberalised Remittance Scheme? 

The legal framework for the administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999 (FEMA). Prior to 2004, there were strict restrictions on fund transfers from India to other countries under FEMA. The RBI introduced the Liberalised Remittance Scheme (LRS) in 2004 to facilitate seamless foreign transactions.

Under the Liberalised Remittance Scheme, all resident individuals, including minors, are permitted to freely transfer up to $2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Additionally, resident individuals can only avail foreign exchange facilities within the limit of $2,50,000.

What Is Tax Collection At Source (TCS) On Foreign Remittance?

The Finance Act, 2020 amended Section 206C of the Income Tax Act, 1961 and introduced a 5 percent tax collection at source (TCS) on foreign remittance under LRS for spending exceeding Rs 7 lakh during the Financial Year. For education abroad with a loan from an Indian Bank, the rate was 0.50 percent.

In the Budget 2023-24, the government proposed an increase in the TCS rate on international spending from 5 percent to 20 percent for all purposes except education and medical treatment, effective from July 1, 2023. However, on May 19, 2023, the government clarified that any payments made by an individual using their international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS.

Due to the new TCS rate, international travel plans will become more expensive and TCS on overseas tour packages will now be subject to a higher TCS rate. Starting from October 1, 2023, the new TCS rates for LRS and overseas tour packages in India are as follows:

• LRS for education financed by the loan will be exempt up to Rs 7 lakh, and charged at 0.5 percent above Rs 7 Lakh.
• LRS for Medical treatment/education (other than financed by loan) will be exempt up to Rs 7 lakh, and charged at 5 percent above Rs 7 Lakh.
• LRS for other purposes will be charged at 5 percent above Rs 7 lakh and 20 percent above Rs 7 Lakh. 
• Purchase of Overseas tour program package will be charged at 5 percent up to Rs 7 lakh, and 20 percent thereafter. 

Concerns And Backlashs

A number of concerns have been raised by netizens and the travel industry regarding the new TCS rates. After the government first notified the new rate in May, it became a trending topic on Twitter for the entire duration. Subsequently, the government had to issue a clarification on the implemented changes. 

According to a PTI report, the travel agents’ body, TAAI, has urged the government to revoke the decision or postpone it until the next fiscal year. The report stated that TAAI President Jyoti Mayal, in a letter to the FM, described the TCS as a major challenge for the travel industry and anticipated it would result in a significant diversion of business to overseas tour operators. She pointed out that Indian tour operators engaged in outbound tours are facing the negative impact of the 5 percent GST, and the introduction of TCS would compound the problem.

Mayal also highlighted the fact that Indian tour companies are becoming less competitive compared to operators outside India who not only save on the 5 percent GST but also on the TCS, which ranges from 5 to 20 percent, and they are not required to register in India.

The association further stated in their letter that the Reserve Bank of India and banks are ill-equipped to monitor and track the limits of Rs 7 lakh per traveler, as there is no mechanism to do so.

According to a report by the Indian Express, the TCS implementation was postponed to October 1 due to resistance from customers and banks requesting more time to prepare their systems. They expressed concerns regarding the implementation of the TCS on international credit card payments, as it would require extensive adjustments to banks’ IT infrastructure. However, they have now completed the necessary system changes to implement the new TCS rate.