The government has backtracked and decided that credit card purchases made abroad will not be covered by the Liberalized Remittance Scheme (LRS). The press announcement issued late on Wednesday night replaced an earlier decision that was met with criticism from industry insiders due to its complexity.
The press statement postponed the implementation of the increase in the collected amount and reversed the policy that taxed credit card purchases over Rs700,000 annually. As of October 1, the source-of-income tax rate has been changed to 20%.
This decision follows a month of uncertainty during which the revised rate of 20% for TCS was stated to take effect as of July 1 in a hastily drafted gazette notification on May 19. The revisions to the Finance Act 2023 had been widely anticipated because of the requirement that the effective date of the amendments be published.
The notification included a paragraph specifying that purchases made with a credit card would be subject to LRS. Under the proposed plan, a 20% increased tax collected at source would be applied to all outbound payments (except from those made for qualifying educational and medical expenses). Social media outcry and government action resulted in a yearly exemption of Rs7 lakh for payments made abroad.
Credit card firms, however, voiced concerns about the lack of clarity on how this would be implemented as the July 1 deadline approached. There is currently no system in place for keeping tabs on combined card spending. It would be very easy for a user to rack up charges greater than Rs7 lakh across many cards without raising suspicion at work.
Gopal Bohra, partner direct tax at NA Shah Associates, argues that self-declaration was one option. Due to the lack of a means to strictly enforce the spending cap, this may be revisited at a later date.
The government acknowledged this was an issue, therefore they removed the threshold at which TCS would be automatically debited from your credit card in a recent news release. In addition, it stopped counting purchases made with a credit card abroad against the LRS cap.
The government has acknowledged the difficulties of TCS for card issuers and for taxpayers generally. According to Amit Singhania, a partner at Shardul Amarchand Mangaldas & Co., “the relaxation by way of threshold of Rs700,000 should provide necessary relief.”
Foreign travel expenses in excess of Rs700,000 per year are subject to TCS at the rate of 20%, and all other terms of the notification remain unchanged. Continued decreases in healthcare and school funding.
Whether this is a temporary easing or a case of kicking the can down the road, with the government planning to reimpose these limits once card firms put in place the infrastructure to track spending overseas, remains to be seen. Taxpayers can breathe a sigh of relief for the time being because, for those with a low tax burden, this was essentially like providing a gift to the government in the form of a loan.
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