New TCS norms on credit card spends: More than a matter of exchange

Money changers are miffed at the tax exemption for credit card forex spends of up to Rs 7 lakh a year under the liberalised remittance scheme

Money changers are miffed at the exemption granted on credit card spends of up to Rs 7 lakh a year under the liberalised remittance scheme (LRS); only expenditure above this threshold will be subjected to 20 per cent tax collection at source (TCS).

This, even as there is no clarification coming forth on its applicability to small-value transactions involving cash forex, wire transfers through banks, and prepaid forex cards. The All India Association of Authorised Money Changers & Money Transfer Agents’ (MACMTA) argues that this privileges credit cards based on the form-factor of transactions.

Money-changing — or, the sum of the $3,000 dollars in cash that you are allowed to carry when travelling abroad — at the systemic level now tops $4 billion.

The irony is that it was MACTA which had made a made a case for bringing credit cards under the LRS in the wake of the 2023 Budget proposal to increase the TCS rate to 20 per cent from 5 per cent, and removal of the threshold limit of Rs 7 lakh, other than for specific cases such as remittances towards education or medical treatment.

MACTA held that low-value remittances will be subjected to TCS at 20 per cent. Again, while lower TCS rates ranging between 0.5 per cent and five per cent were applicable to remittances towards education or medical treatment, these differential rates would make it onerous for authorised dealers (ADs) to classify remittances on the basis of purpose and to apply the correct rate. It would increase the compliance burden for them as well.

An interesting point made by the industry body was that as the sale of forex was by ADs across the counter to residents in India, the question of “remittance out of India” did not arise! This, though, was a case of being clever, as the sale of forex is for use abroad.

MACTA went on to add that a large number of buyers were resorting to forex transactions through credit cards and the Unified Payments Interface. These transactions did not attract TCS and were subject to a lower charge of 2-5 per cent on the forex purchased or utilised; this difference, they said, was adversely affecting money changers. 

The MACTA is stumped because the authorities have given a concession for both credit and debit cards by exempting spends on them of up to Rs 7 lakh a year under the LRS. The reason given was that these are low-value transactions and LRS reporting is cumbersome. This concession was not extended to prepaid cards and forex (cash). This puts middle-class people who take small amounts of foreign currency in cash for their initial expenses abroad — for family trips, employment, and retired people visiting their children — at a disadvantage.

“Prepaid forex cards come under LRS reporting and attract 20 per cent TCS. Thus, when people pay for them, they also have to pay 20 per cent as TCS to the government”, says Bhaskar Rao, general secretary of the MACTA, and managing director of Orient Exchange & Financial Services. He cites data from the Directorate General of Civil Aviation indicating that more than 60 per cent of those travelling overseas are first-time flyers and predominantly blue-collar persons who do not fall under the income-tax bracket. “This class of people are from the economically weaker sections, less educated and don’t hold global credit or debit cards”, adds Rao.

It is feared that the current situation may mean that the black market for foreign currency may be back. The unused forex — from returning travellers — instead of getting into the official market will go black given the premium on offer. The ability of money changers to hawk foreign currency is also hamstrung by the fact that they don’t have enough free play when importing it in the first place. The Reserve Bank of India (RBI) allows them to import only for their own retail sales; they are not permitted to sell even to other money changers. Banks are not subject to such curbs, creating an uneven playing field, even though money changers’ rates are much lower.

Despite the billions of dollars handled, the money-changing business is under-documented. There is no aggregated data on how much forex money changers and banks import annually. Industry sources offer a ball-park figure of $5 billion, split roughly 50:50 between money changers and banks. 

Many of the players have their roots in the old-world forex brokerage business for banks. A shakeout has occurred here as well. We are down to about 15 firms, from 40-odd a few years ago, and as many as 125 in 1998. Five firms account for 75 per cent of the volumes in the forex brokerage business.

The new norms kick in on July 1; money changers hope that they will not be short-changed.