Spending overseas on cards now part of LRS

Using your credit card while travelling and shopping internationally will now become an expensive affair. A recent order from the finance ministry included credit card spending abroad within the $2,50,000 mandate of liberalised remittance scheme (LRS). This is likely to seriously impact the international spendings of high-net worth individuals (HNIs). But, how will it impact your finances? Read on to know more

What is the issue?
Under the LRS scheme, the government has set a limit of $2,50,000 for an Indian citizen to remit abroad on the following expenses:

Travel and education purposes, medical treatment and maintenance of close relatives, gfts/donations, buying securities and physical assets.

Till date, per the Foreign Exchange Management Rules, 2000, transactions done via credit cards were not a part of this. In case you need to spend more than the limit, you would need prior permission from RBI.

This year, the budget raised the percentage of tax collected at source (TCS) on such remittances to 20%, from its earlier threshold of 5%. Effective July 1, 2023, every international credit card transaction will be taxed at 20%. However, it is important to note that this amount can be claimed as a refund/credit while filing your annual ITRs/advance tax.

Mumbai-based finance professional Nilesh Maurya terms this move as bad. “This is not great, especially since now, all forex payments made via credit cards for my international purchases will also come under the LRS scanner”.

People have taken to social media to express their resentment on this move. Remember, the 20% tax will also be applicable on forex conversions i.e. if you are converting Indian rupee to US dollars or any other foreign currency.

Experts also say this move is a bit harch on the card holders. Mumbai-based CA and legal expert Bhavesh Jindal says although the intent here is to widen the tax net, still the tax rate is exorbitantly high at 20%. The far reaching impact is that frequent travellers will now have to take into consideration TCS of 20% while spending. Moreover, it will be important to understand who shall be liable to report the said transaction to tax authorities especially in a situation where credit card pertains to a different bank and settlement is made through a different bank”.

Another CA Nitesh Buddhadev said “Following this announcement, any international purchase will come under the TCS scanner. If you want to invest in an online course from an international institution that costs Rs 1 lakh via your credit card, you will have to pay back Rs 1,20,000 to settle your credit card bills. While it is refundable once you file your returns, the main disadvantage is having some amount of your working or current capital stuck for a certain period of time.”