Taxes are the nourishing lifeblood of every economy. Taxes aid federal institutions. And much like every other economy, Indian government relies on taxes for its income.
The new finance act of 2023 has brought about some revolutionary changes to Indian taxation system. For instance, the removal of long-term tax benefits on the debts, or strengthening the much-talked National Pension Scheme. But amongst all, the recent slurring topic is hike in TCS collected at foreign remittance, which created quite a fuss countrywide.
Eventually, the finance ministry cleared the air recently saying there is no TCS on annual international card spending below 7 lakhs. However, on expenditure over 7 Lakhs on foreign remittance, a rise in from 55 to now 20% TCS is applicable from 1st July 2023.
An overlook of the matter:
Recently, the Reserve bank of India took credit card spending under LRS’s wing. Debit cards were already its part.
In the new framework, all the foreign credit and debit card spending would attract 20% TCS. So even if you were to spend a lakh on your next foreign trip, you would end up paying 20k in taxes.
However, in the recent announcement by the finance ministry, annual transactions below 7 lakhs will be exempted from paying any TCS. However, in case the spending goes above 7 lakh per year, a whopping 20% tax on the extra spending will be collected at the source only.
So, if you spend 10 lakh annually through your credit/debit card, you would pay 20% TCS on additional 3 lakh spent, paying more than 60K just in taxes. Although you can claim the tax savings while filing IT return, but the tax exemption is too low for frequent abroad travellers.
This is also the matter of worry for many parents who have sent their students for foreign education or on medical bases.
People were worried and anxious about the decision. The amendments were highly criticized; some even called it “Tax Terrorism”, The Outlook highlighted.
Different categories of remitting money and their corresponding tax regimes:
In India, remitting money overseas requires citizens to pay TCS. There are three different tax slabs under this category. First, education or medical remittance through loan, which attracted 0.5% tax previously, is now devoid of any TCS. It brings relief to poor families relying on education loan for their ward’s foreign education.
Second, education/medical remittance without loan, which attracted 5% tax previously, is exempted from TCS.
The third and the most popular category is foreign remittance for travelling.
The buzz around TCS and LRS in India is due to the recent changes proposed in Budget 2023. The budget proposes a TCS of 20% for foreign outward remittance under LRS (other than for education and medical purposes), applicable from July 1, 2023. Before this proposal, a TCS of 5% was applicable on foreign outward remittances above Rs 7 lakhs.
India is only country to levy upfront taxes on foreign expenditure:
Unlike any other country in the world, India levies tax on expenditure made abroad. This directly impacts foreign travel. It would result in higher costs for international travel. Travelers would need to ensure compliance with TCS regulations, diligently maintain expenditure records, and on top of that, allocate extra funds to account for the imposed tax.
This could potentially impact their available cash flow, requiring careful financial planning. However, if eligible, individuals might be able to claim refunds or credits for the TCS paid on their foreign expenses. Thus, international travel would involve added financial considerations and the need for proper adherence to tax obligations.
The reason for the hike in taxes:
The Indian government has increased the Tax Collected at Source (TCS) for international spending from 5% to 20% starting from July 1, 2023. This increased tax will apply to international travel, sending money abroad, and other remittances except for education and medical reasons. And one of the prime reasons for this is to contain the Indian wealth in India only.
The hiked TCS rates at 20% for overseas travel would restrict overseas travel spending by High Net Worth Individuals (HNI’s).
According to the Indian Ministry of Tourism, in recent years, the average annual expenditure of Indian travelers on international trips has shown an upward trend.
For example, according to a report by the Indian Ministry of Tourism, the total expenditure on outbound travel by Indian nationals increased from $7.6 billion in 2013 to $18.4 billion in 2018, showcasing a significant growth over a five-year period.
Furthermore, data from the Reserve Bank of India (RBI) revealed that the expenditure on foreign travel by Indian individuals increased from $9.7 billion in the fiscal year 2015-2016 to $18.4 billion in 2019-2020, indicating a substantial rise in spending over a four-year period.
Although the numbers declined significantly during the pandemic, it does not undermine the need of limiting the foreign travel expense for India.
If we look on personal level, a survey conducted by the Indian Association of Tour Operators (IATO) in 2019 reported that Indian outbound travelers spent an average of around $2,500 to $3,000 per person on international trips.
Another study by the World Tourism Organization (UNWTO) in 2017 estimated that the average expenditure per outbound Indian traveler was approximately $1,500 per trip.
Although laving 20% TCS is huge, this still does not cover most of the Indian taxpayers. Hence, the Indian government does not plan to stop at this. The finance ministry is also delving on the thought of merging the TCS with TDS (Tax Debited at source), to bring under the umbrella of Direct Tax Regime. On one hand, the merger will simply the process of tax collection and harmonize the thresholds and rates for TDS and TCS to ensure consistency across different types of transactions. But on the other hand, merging two tax collection mechanisms may involve challenges during the transitional phase. It would require careful planning, communication, and guidance from the tax authorities to ensure a smooth transition without causing disruptions.
The Indian government has increased the Tax Collected at Source (TCS) for international spending from 5% to 20% to restrict overseas travel expenses and keep wealth within the country. While this may impact travelers and require careful financial planning, it aligns with the rising trend in Indian travelers’ international expenditure. The government is also considering merging TCS with Tax Deducted at Source (TDS) to streamline tax collection. These changes reflect the government’s efforts to manage foreign travel expenses while balancing taxpayer needs.