The Indian government is contemplating imposing a tax on overseas credit card expenditures exceeding Rs 7 lakh under the Liberalized Remittance Scheme (LRS). This proposal is likely to be unveiled in the forthcoming Union Budget scheduled for July 2024, after the formation of a new cabinet.
The move stems from the government's concern about the rising outflow of foreign exchange through LRS remittances, which have witnessed a significant surge in recent years. The LRS scheme permits Indian residents to freely transfer up to $250,000 annually for various purposes.
The initial plan was to implement this regulation on April 1, 2024. However, due to the code of conduct for elections and unresolved implementation details, the proposal has been deferred and is now expected to be part of the upcoming budget announcement.
According to government sources, most public sector banks, which were previously unprepared with the necessary application programming interface (API) to comply with the tax collection, are now on board. State Bank of India, Canara Bank, and Bank of Baroda have pledged their cooperation, while private sector banks have already been compliant.
The primary objective behind including overseas credit card spends under LRS is to curb large foreign exchange outflows. Data from the Reserve Bank of India reveals that outward remittances under LRS during the April-January period of 2023-24 reached $27.42 billion, reflecting a 24% increase compared to the $22.08 billion remitted in the corresponding period of the previous year.
To address concerns regarding the differentiation between personal and business transactions on credit cards used overseas, the government officials have proposed a "disclosure mechanism" for taxpayers. This mechanism would require individuals to collaborate with banks and the Income Tax Department to verify the applicability of the tax collected at source (TCS).
"For official business visits, it would be appropriate to utilize a business credit card issued in the company's name," suggested a source, highlighting the significance of the disclosure system. It's important to note that the government clarified last year that overseas transactions for corporate or business purposes would be exempt from TCS.
In February 2023, the government announced the inclusion of foreign currency credit card spends within the LRS's annual limit of $250,000. Additionally, cardholders were subjected to a TCS of up to 20% on foreign transactions made using credit cards. However, the government provided some relief in June 2023, announcing that there would be no change in the TCS rate for LRS transactions and overseas travel tour packages, regardless of the payment method, for amounts up to Rs 7 lakh per person annually. This move addressed concerns raised about the initial proposal.
The potential implementation of this tax on high-value overseas credit card spending has generated mixed reactions. While some acknowledge the government's need to manage foreign exchange outflows, others express concerns about the impact on genuine high spenders, like those seeking medical treatment abroad. The upcoming Union Budget is likely to shed more light on the specifics of this proposal and its implications for Indian travelers and consumers.
