Banks have flagged the issue to the government, which is examining the matter, three people familiar with the matter said. “A call will be taken shortly,” a government official said, adding that the issue of transition was being examined.
The finance ministry is expected to issue a clarification shortly, another official said.
Foreign currency spending above ₹7 lakh via credit card will be counted towards the Liberalised Remittance Scheme (LRS) and face 20% tax collected at source (TCS). This is scheduled to become applicable from July 1.
Banks are awaiting final notification from the Central Board of Direct Taxes on the implementation of the TCS regime, following which they will begin work on the internal systems. “Reporting systems are still not ready … Adequate time will be required for their development … The issue has been flagged with the government,” one of the people said.
The lenders will need to update their internal systems, as also have an efficient mechanism to be able to track when an individual holding multiple cards exceeds the ₹7 lakh foreign currency spending limit and becomes liable to face the levy.
Higher tax collected at source
The finance ministry on May 16 scrapped Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which kept international credit card spends out of the LRS ambit. It said credit card spending had been brought under the LRS regime to bring them on a par with debit cards, which were already covered.
The annual LRS spending limit is $250,000 per person, beyond which RBI‘s approval is required. This implies that TCS, which was raised to 20% from 5% in the budget, became automatically applicable on international credit card spending.
The ministry, on May 19, exempted overseas credit or debit card spending up to ₹7 lakh a year by individuals from being counted towards LRS and tax, following public backlash. LRS up to ₹7 lakh a year for educational purposes is exempt from TCS. Beyond that, it attracts a 5% levy. For those who take loans for overseas education, a lower 0.5% TCS will be levied above the ₹7 lakh threshold.
