The Tax Collected at Source (TCS) is a mechanism put in place by the government to control tax evasion. It works by putting the onus of collection of tax on the seller of goods / services, seemingly increasing the price of the same. However, this tax paid by the buyer is allowed as a tax credit at the time of filing of their income-tax returns. In this article we will put a spotlight on foreign remittances and the applicability of TCS on them.

TCS is leviable broadly in the following two types of foreign remittances:

1. Remittances made under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI)
2. Purchase of overseas tour packages

What are the remittances covered under the LRS?

Individuals can draw foreign currency up to USD 2,50,000 in a financial year freely for

1) Private visits to any country (except Nepal and Bhutan)

2) Gift or donation

3) Going abroad for employment

4) Emigration

5) Maintenance of close relatives abroad

6) Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up

7) Expenses in connection with medical treatment abroad

8) Studies abroad

9) Any other current account transaction which is not covered under the definition of current account in FEMA 1999

An amendment made to the Foreign Exchange Management Act, 1999 resulted in credit card payments being included in the ambit of LRS with effect from 16^th May 2023.

What is the rate of TCS on the prescribed foreign remittances?

There are essentially 3 different rates applicable based on the circumstances involved. These rates are 20%, 5% and 0.5%. The following table might be useful to understand the applicability of the rates:

Note that the above rates take effect from 1^st July 2023.

Prior to 1^st July, the following rates are applicable:

It is pertinent to note that effectively, international credit card spending > ₹ 7 lakhs in a financial year attracts 5% TCS if the transactions occurred between 16^th May 2023 to 30th June 2023 and 20% TCS if occurring on or after 1^st July 2023.

Further, the Liberalised Remittance Scheme by the RBI only seeks to restrict remittances made by individuals. Effectively, the provisions of TCS with respect to remittances under LRS will apply only to individuals – corporate entities can continue to make foreign remittances without worrying about TCS on LRS transactions as per the status quo; i.e., regular banking channels where 15CA/15CB along with invoices/agreements need to be submitted to the Authorised Dealer (AD).

While travel for business has been included in the LRS, since the LRS is applicable only to individuals, TCS would be apply only if the travel is for the purpose of business of the sole proprietor/businessman. Where an individual travels abroad for business purposes on behalf of his employer (who is not an individual), the provisions of TCS shall not apply. This would mean that even where an employee incurs expenditure in respect of foreign business travels and subsequently claims a reimbursement from the employer, there will be no TCS impact. On similar lines, international card usage does not attract TCS where a corporate credit card is being used for business purposes.

When is the amount deducted and by whom?

The amount is deducted by an authorised dealer of foreign exchange (in case of remittance under LRS) or a seller of foreign overseas package tour, as the case may be, at the time of either debiting the amount payable to the buyer or at the time of receipt of the amount from the buyer, whichever is earlier.

I want to go on a trip to Europe and a tour operator is offering me a packaged deal. How does this affect me?

Let us say that the packaged tour costs about ₹ 6 lakhs and the applicable GST rate is 18%. The amount payable by you would work out in the following manner:

Note that while the trip might cost you ₹ 7,08,000/-, you end up paying 8,49,600 upfront due to the effect of TCS. The additional ₹ 1,41,600 paid by you would be available as a credit to you at the time of filing income-tax returns.

To summarize, while the cost of the foreign tour has not changed, the amount to be paid immediately upfront has increased. This can lead to a significant amount of your funds being blocked for months together, depending on how long the processing of income-tax refund takes.

Banks and travel companies have reportedly appealed to the government for an extension of the deadline, citing their unprepared systems. The outcome remains uncertain as we await the government’s decision on a possible extension.

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