TCS on foreign remittances: FinMin evaluates issues flagged by banks

July 1 deadline extension not ruled out

The finance ministry is “evaluating” the issues related to the implementation of a new rule that mandates 20 per cent tax collected at source (TCS) on foreign remittances.
 

“The decision on extending the July 1 deadline (for the implementation of the new rule) has not yet been taken. However, it cannot be completely ruled out amid procedural challenges,” a government source privy to the matter told Business Standard. He confirmed that a few banks have raised concerns with the finance ministry regarding the preparedness of the reporting systems required to implement the new rule.
 

“Some banks are ready with the required system but a few of them have sought more time. A few credit card companies, too, flagged that they would need some modification in the existing set of procedures, which would not be done by July 1,” he said.

The official said the government could come out with a clarification before July 1.
 

According to bankers, there is ambiguity on several fronts on which clarity is needed, particularly, if the amount is remitted using several cards and bank accounts. “We have sought some clarification on this issue. We are yet to get any reply,” said a senior executive of a large bank. “If it is done through a debit card, the bank has access to the bank account from which the tax can be deducted. If it is a credit product… what if the customer reverses the transaction?” the person said.
 

In May, the government decided that spending in foreign exchange through international credit cards would be covered under the RBI’s Liberalised Remittance Scheme (LRS), under which a resident can remit money abroad up to a maximum of $250,00 per annum without the authorisation of the Reserve Bank of India (RBI). The Budget for FY24 hiked the TCS rate to 20 per cent, from 5 per cent, for overseas tour packages and funds remitted under the LRS (other than that for education and medical purposes).

Later, the government clarified that no TCS would be levied on international spending of up to Rs. 7 lakh a year by using credit cards.

The Department of Economic Affairs is working on the implementation process for the new rule with the RBI, it has been learnt.

Its team recently met central bank officials in Mumbai and discussed various aspects of the new rule and the complexities around it, another source said. In case the government extends the deadline, it would consider issuing a circular for the same, clarifying the possible timeframe, a former bureaucrat said.

According to bankers, a person can use several credit cards from different banks to make a payment. In such a case, a particular bank would not know what a person has spent through other banks’ credit cards.

Furthermore, unlike transactions through a bank account in which the tax would be automatically debited from the bank account, in the aforementioned scenario, since the amount could be large, the credit card might not have the limit to deduct the tax amount.

“In this case, it’s a large sum of money. The credit limit may not be available. Second, what if someone spends Rs. 10 lakh from a bank account and an additional Rs. 5 lakh from a credit card? How to link them… that integrator is also not there,” said a senior executive from a mid-sized bank. “If Rs. 7 lakh is remitted from 5 different credit cards, how will we know that?”

The banks raised these issues with the Indian Banks’ Association, which communicated the same to the government. According to sources, banks want “frequently asked questions (FAQ)” about the standard operating procedure in connection with this matter.

“From a broad policy to the fine print of SoP – there are a lot of questions which are unanswered right now,” said another banker.

Tax conundrum 

• 20% TCS on foreign remittances under the LRS (against 5% now), according to 2023-24 Budget. The new rule to kick in on July 1
• 5% TCS on medical and education remittances beyond Rs. 7 lakh
• Rs. 7 lakh cap on credit and debit card spends in a year during foreign travel for LRS exemption
• $250,000 amount that a resident is freely permitted to remit outside India in a financial year under the LRS