Taxpayers and experts sharply criticised the government’s decision from earlier this week to bring credit card transactions in a foreign currency under what is known as the liberalised remittance scheme (LRS), which will now involve a 20% levy as tax collected at source (TCS) for most such payments, as a move that will hit people’s foreign travel budgets, constrain cash flows, and possibly nudge them to go back to cash for forex. If the concern was tracking these transactions, they said, even a nominal tax would have sufficed, and if the concern was that there was too much forex outgo, then simply reducing the LRS limit -- $250,000 a year at present -- would have done the job.
The government notified the new Foreign Exchange Management (Current Account Transactions) Rules on Tuesday, deleting a section that exempted credit card payments from the LRS, a mechanism that lays down rules and compliances in case Indian residents want to spend, invest, or send, money abroad.
The government said the decision was taken in order to deter people who breach the LRS limit by routing large spends through credit cards, and reiterated that expenses on education, health and business visits of employees and card payments for services such as Netflix and Uber are outside its purview. To be sure, credit card spends overseas were previously never part of the LRS limit so there can be no question of credit card spends causing the limit to be exceeded, requiring action from the government.
At least a dozen tax experts, professionals, and exporters, who asked not to be named, said the government’s decision imposes 20% TCS on almost all transactions and would discourage people from using online payments and push them to buy foreign exchange such as dollars from the market. Some of these people did not rule out that the problem could even spur the use of illegal hawala routes.
{{/usCountry}}At least a dozen tax experts, professionals, and exporters, who asked not to be named, said the government’s decision imposes 20% TCS on almost all transactions and would discourage people from using online payments and push them to buy foreign exchange such as dollars from the market. Some of these people did not rule out that the problem could even spur the use of illegal hawala routes.
{{/usCountry}}The Union finance ministry justified it through a frequently asked questions (FAQs) document on Thursday. It said the decision was taken in order to bring international credit cards at par with debit cards “in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS [Liberalised Remittance Scheme] for prudent foreign exchange management and to prevent by-passing of LRS limits”.
The LRS scheme, introduced in February, 2004, allows Indian residents to freely remit up to $250,000 per financial year for any permissible current or capital account transaction or a combination of both. Any person crossing this limit will require prior approval of the Reserve Bank of India (RBI).
The new regime will affect almost everyone at a time when business as well as personal expenses are done on personal credit cards, then reimbursed. It emanates from a protectionist mindset that India has long shed, and is out of step with an otherwise vibrant economy.
Not only will the change lead to more headaches for the citizen, it will likely reverse gains made in cashless transactions. LRS was meant to promote trade and investment, check money laundering and facilitate seamless capital flows in and out of the country. It was a strong step towards convertibility but change threatens to defeat these aims in a single stroke. It must be rolled back.
“Payments by debit cards etc have been treated as LRS even earlier. Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits,” the finance ministry said, citing RBI’s hand behind the decision.
This is combined with a decision announced in the Union Budget this year to raise TCS -- an advanced tax deposit that can be offset against a person’s tax liability -- to create a 20% additional burden over such spends. “Cost of money in India is high compared to developed nations. Even though the TCS amount would be refunded and it may not matter much for big firms, this would be difficult for small businesses as they often suffer from liquidity crunch. It is an additional burden, contrary to the government’s claim of promoting ease of doing business,” a trade expert said.
“It is a general perception that once money is gone to the government’s coffer, any refund is a herculean task. Why to burden people with 20% TCS? Besides, chances of litigations increase,” a tax expert said.
Abhishek A Rastogi, author and constitutional expert, said the government must rethink and reduce the levy from 20%. “Certainly, the government isn’t considering this as another revenue stream as credit is eligible. If the purpose is to track international credit card transactions, it could be done by keeping a nominal levy. Hope the endeavour is not to discourage outflow of money. If that is the case, then people may take alternate route,” he said.
Experts said the move will not have much impact on big corporate houses because they can have appropriate policies to reimburse TCS components to their executives, but employees of small firms would not spend money from their own credit cards.
The government’s specific FAQ on the question – “Does LRS cover business visits of employees” – said: “No. When an employee is being deputed by an entity for any of the above, and the expenses are borne by the latter, such expenses shall be treated as residual current account transactions outside LRS and may be permitted by the AD [authorised dealers] without any limit, subject to verifying the bona fide of the transaction.” Experts, however, said the government’s directive on this matter needs more clarity.
Kunal Savani, partner at law firm Cyril Amarchand Mangaldas said: “In many past instances, persons remitting the funds overseas (mainly for travel purpose) would accept 5% TCS as additional cost and not file their Indian income tax returns. The higher TCS rate (20%) makes its almost mandatory for individuals remitting funds overseas to file their Indian income tax returns and claim the TCS paid either as refund or adjust it against their tax liability.”
The new tax will also be applicable on transactions in foreign currency made from India, and also result in more paperwork.
According to Russell Gaitonde, partner at Deloitte India, “These forex payments will cover credit card transactions undertaken by the individual not only while travelling abroad, but also while being physically present in India and making forex purchases, such as online purchases. Issuers of international credit cards in India (i.e. Banks / NBFCs) will need to ensure that their credit card customers are in compliance with the aforesaid rules/limits, and the Banks/NBFCs will need to upgrade and update their systems. Additionally, starting July 1, 2023, Banks / NBFCs will need to start collecting TCS at the enhanced rate of 20% from their credit card customers on their forex spends done using their credit cards.”