International debit and credit card transactions of up to Rs 7 lakh per financial year will be excluded from the limits of the Liberalised Remittance Scheme (LRS), the finance ministry said Friday, following widespread criticism over the recently notified adjustments to the use of international credit cards and, therefore, will not face any taxation at source (TCS) up to this monetary limit.
“Concerns have been raised about the applicability of taxation at source for small transactions under the liberalized remittance scheme from July 1, 2023. To avoid any procedural ambiguity, it has been decided that individuals who use their international debit or credit cards for any payment of up to Rs 7 lakh per financial year will be excluded from the LRS limit and hence will not attract any TCS,” it said.
Existing TCS preferential treatment for education and medical 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 its rules under the Foreign Exchange Management Act (FEMA) to include international credit card spending outside India in the LRS. As a result, spending on international credit cards will attract a higher TCS rate of 20% from July 1.
Now, with Friday’s decision, the 20% TCS rate may be imposed on credit card transactions above Rs 7 lakh.
Under the LRS, all resident individuals (including minors) can remit up to US$250,000 (approximately Rs 2.06 crore) annually abroad without prior approval from the RBI. In a notification to allow credit card spending under the LRS, the government said the decision was taken after consultation with the Reserve Bank of India (RBI).
The move has drawn a lot of criticism, as it is seen as posing a significant compliance burden on both card-issuing banks and consumers. Furthermore, experts fear that even though taxpayers can claim a refund of the TCS tax when they file their returns, this could result in their funds being locked until the tax department initiates the refund.
In a detailed set of frequently asked questions (FAQs) published on Thursday, the finance ministry said the RBI had written to the government on more than one occasion pointing out the need to remove the distinction between the use of international credit and debit cards, which are already counted under the LRS.
Intermediation between international credit and debit cards for overseas travel, individuals exceeding the LRS limit using the credit card exclusions under it and international credit cards being issued with limits in excess of the current LRS limit of $250,000. The reasons were cited by the government for the latest change in rules for credit card spending outside India.
As of now, the use of international credit cards to pay for overseas conferences is not covered by LRS. However, international debit cards are already covered by the LRS limit.
Also, all current account transactions such as foreign currency withdrawals using international credit cards within India are governed by Regulation 5 of the FEM (CAT) Rules, 2000 and are protected by the LRS.
In a notification dated May 16, it brought credit card spending outside India under the scope of the LRS by omitting Regulation 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. International credit card spending was earlier excluded from the LRS by Rule 7 of the FEM (CAT) rules.