Centre blinks on forex credit card: No tax at source for transactions below Rs 7 lakh

Existing beneficial TCS treatment for education and health payments will also continue, it said, adding that the necessary changes to the Foreign Exchange Management (Current Account Transactions) Rules, 2000 will be issued separately.

On Tuesday, the Centre amended rules under the Foreign Exchange Management Act (FEMA), bringing international credit card spends outside India under the LRS. As a consequence, spending on international credit cards would have then attracted a higher rate of TCS at 20 per cent from July 1.

Now, with Friday’s decision, the 20 per cent TCS rate is likely to be levied on card transactions beyond Rs 7 lakh.

Under LRS, all resident individuals, including minors, can remit up to US $250,000 (approximately Rs 2.06 crore) abroad per year without prior approval from the RBI. The government, in the notification allowing credit card spends under LRS, had said the decision was taken in consultation with the Reserve Bank of India (RBI).

The move generated a lot of criticism as it was seen as posing a significant compliance burden on both card-issuing banks and consumers. Also, experts raised concerns that even though taxpayers can claim refunds on the TCS levy at the time of filing their returns, this could result in their funds being locked until the refund is initiated by the tax department.

In a detailed set of Frequently Asked Questions (FAQs) issued Thursday, the Finance Ministry said the RBI had written to the government on more than one occasion pointing to the need to remove the differential treatment between usage of international credit cards and debit cards, which are already counted under the LRS.

An arbitrage between international credit and debit cards for overseas travel, individuals exceeding LRS limits making use of the exclusion of credit cards under it and international credit cards being issued with limits in excess of the present LRS limit of US $250,000 were some of the reasons being cited by the government for having undertaken the latest tweaks in rules for credit cards spends outside India.

The use of an international credit card to make payments towards meeting expenses while overseas was so far not covered under the LRS. International debit cards, however, were already covered under the LRS limit.

Also, all current account transactions such as drawal of forex undertaken on international credit cards within India were subject to Rule 5 of the FEM (CAT) Rules, 2000 and covered under LRS.

In the notification issued on May 16, credit card spends outside India were brought under the ambit of the LRS by omitting Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. The spending on international credit cards was earlier excluded from the LRS by way of Rule 7 of the FEM (CAT) Rules.