The Indian government recently announced a new regulation that will impact anyone planning to use their credit cards for transactions abroad. Effective from July 1, 2023, a 20% TCS (Tax Collected at Source) will be levied on all international credit card transactions. This move has generated a lot of buzz and raised concerns among travelers. In this blog post, we will delve into the details of this regulation, its implications on various use cases, and discuss possible workarounds.
Before we dive into the specifics, it’s essential to differentiate between Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). TDS refers to the tax deducted by the payer at the source of income, such as employers deducting tax from employees’ salaries. On the other hand, TCS is the tax collected by the seller at the point of sale, like the TCS levied on foreign remittances.
Let’s consider Shubham, who went on a vacation to Dubai and used his credit card for all his transactions, including hotel bills, shopping, restaurants, and cabs. Assuming his total spending was ₹2.5 lakh, he would be required to pay 20% TCS upfront, amounting to ₹50,000. The total amount debited from his credit card would be ₹3 lakh, including the TCS. It’s important to note that additional charges such as forex markup and GST may also apply.
In another scenario, Shruti subscribes to music streaming services from the UK and purchases a Software-as-a-Service (SaaS) product from the US. Despite conducting these transactions from India, Shruti will still be subject to the 20% TCS on all international transactions.
Use Case 3: Booking Travel Packages Aman plans to book a honeymoon trip package for the Maldives. The travel agency based in India quotes him ₹5 lakh, but since Aman prefers to pay via debit card, cash, or net banking, he will have to bear the 20% TCS. Consequently, he would need to pay ₹6 lakh upfront instead of the initial ₹5 lakh.
Riya, who is studying in Canada, relies on periodic transfers of money from her parents to cover her expenses. Her parents would need to pay TCS on these bank transfers.
When individuals like Ram travel abroad for medical treatment, the 20% TCS would also apply to their expenses.
The government has introduced this regulation for several reasons, including taxing the wealthy and high net worth individuals, increasing TCS cash flow, expanding the tax net, and potentially promoting domestic tourism. However, this move is expected to have an adverse effect on the Indian credit card industry. Premium credit cards, which previously offered excellent rewards on international transactions, may lose their allure due to the additional TCS burden.
It is still uncertain how this regulation will impact foreign tourism. While some frequent travelers may not be significantly affected as they utilize alternative payment methods, others might reconsider their travel plans. Only time will reveal the true impact on the industry.
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