Your Next Foreign Trip is Becoming Expensive: Understanding the 20% TCS on International Credit Card Transactions

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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.

Understanding TDS and TCS

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.

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Use Case 1: International Vacation Expenses

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.

Use Case 2: Subscriptions and Online Purchases

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

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.

Use Case 4: Remittances for Education

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.

Use Case 5: Medical Treatment Abroad

When individuals like Ram travel abroad for medical treatment, the 20% TCS would also apply to their expenses.

Government's Objective and Impact

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.

Impact on Foreign Tourism

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.

Important Considerations and Workarounds

There are a few key points to remember regarding this regulation:

Approval for High-Value Transactions: It’s crucial to note that any foreign remittance or purchase exceeding $250,000 will require prior approval from the Reserve Bank of India (RBI). This means that individuals planning significant transactions should be prepared to seek the necessary clearance before proceeding.
Lower TCS Rates for Medical and Educational Transactions: While the 20% TCS applies to most international credit card transactions, there are certain exceptions and lower rates for specific categories. Medical and educational expenses incurred abroad generally attract lower TCS rates. It is advisable to consult the relevant guidelines and regulations to determine the exact rates applicable to these transactions.
Exploring Alternative Payment Methods: With the introduction of the 20% TCS on international credit card transactions, individuals may need to consider alternative payment methods to minimize the impact of this additional tax. Cash payments, payments through friends or family members abroad, or utilizing other digital payment platforms that may offer more favorable rates could be viable alternatives. However, it is essential to be mindful of any legal and regulatory requirements associated with these methods.
Prepaid Forex Cards: Prepaid forex cards are a popular option for individuals traveling abroad, as they offer the convenience of card payments and the ability to load a specific amount in advance. With the TCS regulation in effect, using prepaid forex cards might help travelers manage their expenses more efficiently and avoid the upfront TCS deduction on credit cards.
Plan and Budget Accordingly: The implementation of the 20% TCS on international credit card transactions necessitates careful planning and budgeting for individuals traveling abroad or making international purchases. It is essential to factor in the TCS amount when estimating expenses and ensure sufficient funds are available to cover the additional tax liability.
Seek Professional Advice: Given the complexity of taxation regulations and the potential impact on personal finances, it is advisable to consult with a certified financial advisor or tax professional. They can provide guidance specific to individual circumstances and help navigate the intricacies of the new TCS regulation, ensuring compliance while minimizing the financial burden.
Stay Informed and Monitor Updates: As with any regulatory change, it is crucial to stay informed about updates and developments regarding the TCS on international credit card transactions. Regularly monitoring official government sources, financial news, and consulting relevant experts will help individuals stay up to date with any modifications, exemptions, or clarifications related to the TCS regulation.

Conclusion:

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