New Tax Rule on Foreign Credit Card Spending Under LRS Faces Criticism from Travel Industry

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The Indian government’s recent decision to include international credit card spending under the Liberalised Remittance Scheme (LRS) and subject it to a 20% tax collected at source (TCS) has drawn backlash, particularly from the travel and tourism industry. Officials have clarified that foreign currency payments made through international credit cards, such as digital subscriptions or purchases on foreign e-commerce sites, will now count toward an individual’s LRS account and attract the TCS.

However, purchases made in Indian rupees will not be counted against the LRS or face the TCS. In addition to individual credit card spending, corporate cards used for official expenses overseas will also not be subject to the TCS, as these transactions fall under residual current account activities outside the LRS. The Ministry of Finance issued detailed FAQs to explain the rationale behind bringing credit card spending under the purview of the Reserve Bank of India’s LRS with immediate effect. The 20% TCS rule for LRS will come into effect on July 1.

The decision has faced criticism and sparked concerns within the travel and tourism industry. The ministry defends the change by stating that it aims to achieve parity between remittances and overseas spending using debit and credit cards. The recent notification from the ministry revoked Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which previously excluded international credit card spending from the LRS, while debit card payments were covered. However, experts have called for further clarity regarding the practical implementation of these changes. Determining whether an employee’s travel qualifies as a business trip and verifying whether expenses are borne by the employer could pose challenges. The involvement of authorized dealers (AD) in processing payments and the use of credit cards further complicate the implementation process.

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