Credit card spending abroad under Government scrutiny again
With the rise in remittances under the Liberalised Remittance Scheme (LRS), spending through international credit cards is prominently on the government’s radar. However, a decision has yet to be made about the date to bring it under LRS.
A top government official confirmed this: “As more and more Indians go abroad, this means spending through cards is also on the rise. Certainly it is on our radar.” Last May, the Finance Ministry issued a notification bringing credit cards under the LRS ambit with 20 per cent tax collection at source (TCS). Debit cards are already covered under LRS.
However, in June last year, it was announced that to give adequate time to banks and card networks to implement requisite IT-based solutions, the government had decided to postpone the implementation of its May 16 notification. This would mean that international credit card transactions, while overseas, would not be counted as LRS and hence would not be subject to TCS. The Press Release dated May 19, 2023, stands superseded, the government said.
Under LRS, all residents, including minors, can freely remit up to $250,000 per financial year (April–March) for any permissible current or capital account transaction or a combination of both. Further, residents can access foreign exchange facilities only within the limit of $250,000. Since using a credit card abroad is not part of spending abroad, data is not maintained for that.
There are reports that RBI has instructed banks to be prepared for the inclusion of such spending in the LRS. It is working closely with banks to ensure a smooth transition. Once this happens, any spending beyond ₹7 lakh will attract TCS at 20 per cent tax. Individuals may be eligible for a tax refund if the TCS amount exceeds their total tax liability.
However, outward remittances under the LRS for resident individuals on travel can give some indication of spending through credit cards. RBI Data showed that in FY23, total outward remittance was over $27 billion, of which $13 billion means around 50 per cent was for travel. Similarly, in FY24, total remittance rose to $31.7 billion, of which nearly 53 per cent or over $17 billion was for travel. Even this year, out of $2.3 billion in remittance in March, nearly $1 billion is spent on travel. In April, total remittance was over $2.2 billion, while for travel, it was $1.14 billion.
Rule 5 of Foreign Exchange Management (Current Account Transactions) Rules, 2000, mandates prior approval from the Reserve Bank of India for every drawal of foreign exchange for transactions. However, Rule 7 says Rule 5 will not apply to international credit card payments made during an overseas visit.
Now, to reintroduce the provision to bring international credit cards under LRS, Rule 7 needs to be deleted. Once this happens, the use of international credit cards during overseas visits will be tightened and brought under the purview of Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, which deal with LRS. This would allow RBI to monitor credit card use closely for foreign travel. The deletion will ensure that payments for foreign tours through a credit card do not escape TCS.