Many were of the opinion that tax deduction at source (TDS), which is as old as the Income Tax Act, 1962, was a master-stroke by the taxman to ensure that they get some amount of tax at a transactional level instead of having to wait for the taxpayer to file his returns and pay his taxes.

Since then, the scope of TDS has been expanded in such a manner that there is possibly no transaction that does not get covered by TDS. It has worked wonders for the taxman to get to know what they need to know — values at which properties have been sold, for instance.

The taxman appears to be thinking that the scope for covering more transactions under TDS is limited and hence has turned his attention to another concept that sounds similar to TDS but is not — TCS or tax collection at source.

TCS and LRS

Budget 2023 proposed TCS on foreign travel through tour operators and also sought to bring international credit card transactions under the Liberalised Remittance Scheme (LRS) issued by the Reserve Bank of India. Recently, the Ministry of Finance had to resort to hasty clarifications, FAQs and quite a bit of back and forth resulting in the taxpayer being even more confused than he was when the proposal was announced.

On May 16, the Finance Ministry amended rules under the Foreign Exchange Management Act (FEMA) to bring international credit card spending under the LRS. All international transactions made using credit cards when outside India were brought under the RBI’s LRS scheme, with immediate effect.

Amidst a backlash and concerns over the 20 per cent tax collection at source (TCS) on credit card spending outside India, the Ministry of Finance clarified that no TCS will be levied on individual payments using international debit and credit cards of up to ₹7 lakh in a financial year from July 1, 2023. However, medical and education spends in this regard will attract a levy of only 5 per cent.

It appears that in the case of remittance for the purpose of any education, there would be a TCS of 0.5 per cent if the amount is sourced through a loan. Else, the rate of TCS would be 5 per cent.

TCS was being mandated only on specific transactions such as payments made for alcoholic liquor for human consumption, tendu leaves, timber obtained under a forest lease or other modes, scraps and coal, lignite or iron ore, sale of motor vehicle and payments made to authorised dealers. The objective was to collect information about these transactions so that that the taxman is aware of them. Credit card transactions in excess of ₹7 lakh (for international transactions or tour packages paid through debit or credit cards) have been added to this list.

Scrap the levy

While the taxman can get a lot of information from this levy, tax collection would be minimal. There is so much information available on this now that taxpayers will take all the necessary precautions to ensure that they do not get hit by TCS. Even if they do, the TCS will show up in their tax credit statement and he can claim a credit for the amount of TCS.

The tax collection from TCS would be in the Government coffers from the time the authorised dealer remits it to the Government to the time the taxpayer claims it in his return. The Finance Ministry should seriously take a relook at this proviso and ascertain whether it is worth all the effort. Since the amendment has a liberal threshold and covers only a few transactions, the Ministry would do well to scrap the 20 per cent provision.

The writer is a chartered accountant

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