The Finance Ministry has responded to the severe backlash against its new policies on foreign transactions by clarifying that debit or credit card transactions made by individuals abroad, up to Rs 7 lakh, will be exempt from the 20% tax collected at source (TCS). This clarification comes after Finance Minister Nirmala Sitharaman announced in the Budget 2023 that the TCS rate on non-educational and non-medical transactions made abroad would be increased from 5% to 20% starting from July 1.
The recent notification issued by the Ministry of Finance brought international credit card transactions within the ambit of the TCS, which previously enjoyed an exemption. This move was met with intense criticism from various quarters, including businessmen, journalists, and Opposition leaders. The primary concerns raised were the unnecessary 20% rate, suggesting that even a 0.1% rate would suffice for tracking transactions, and the burden of compliance associated with the new policy. In response to these concerns, the Finance Ministry announced on Friday that transactions up to Rs 7 lakh per financial year made by individuals using their international debit or credit cards would be excluded from the Liberalised Remittance Scheme (LRS) limits and would not attract any TCS.
The government also assured that the existing beneficial TCS treatment for education and health payments, which have a much lower rate of TCS, would continue. The government’s release stated that the necessary changes to the rules regarding foreign exchange management would be issued separately. This clarification aims to address the procedural ambiguity surrounding the applicability of TCS to small transactions under the LRS, while still maintaining effective tracking of transactions. In conclusion, the Finance Ministry’s clarification provides relief to individuals by exempting small foreign transactions up to Rs 7 lakh from the 20% TCS. This move aims to address the concerns raised by various stakeholders and reduce the compliance burden associated with the new policy.