The recent announcement regarding the application of tax collection at source (TCS) on foreign payments made using credit cards elicited a wide spectrum of emotional reactions and broad statements. However, understanding the principle and ramifications of this measure is critical in order to avoid undue alarm.
What is TCS (Tax Collection at Source) on Credit Card Payments?
- TCS on credit card payments refers to the use of tax collection at source (TCS) on international payments made with credit cards.
- When individuals use their credit cards for overseas transactions, the government collects a percentage of the transaction value as tax at the moment of payment.
- This tax amount is then offset against the individual’s advance tax and final tax liabilities when their tax returns are filed.
- TCS on credit card payments is intended to track international expenditure and ensure that individuals accurately declare their income while encouraging tax compliance.
- TCS is used when users use their credit cards to make payments in foreign currencies.
- Taxation: The government collects a certain proportion of the payment amount as tax. The credit card company or payment processor collects this tax immediately.
- Adjustable Tax: The tax amount received through TCS is offset against the individual’s tax liabilities when the income tax returns are filed. It is not an additional tax burden, but rather a tax prepayment that can be offset against the final tax payable.
- TCS on credit card payments assists the government with tracking overseas expenditure and ensuring that individuals appropriately report their foreign transaction income.
- Rates and Thresholds: Depending on government rules, the tax percentage and thresholds may differ. These rates and thresholds may change from time to time.
- Exclusions: Certain categories, such as education and medical expenses, may be free from TCS or have lower tax rates. Payments made with overseas debit or credit cards up to a certain limit may also be exempt from TCS.
What is the Need for Changes in TCS?
- Anomaly in Remittances: The Liberalised Remittance Scheme (LRS) permits individuals to send a specific amount of money abroad without first obtaining permission from authorities. Payments made with credit cards, on the other hand, were not subject to the LRS limit, resulting in an anomaly in which considerable overseas payments were made without limitation.
- Spending Disproportionately: The original use of TCS on LRS remittances attempted to track foreign spending that was disproportionate to individuals’ declared income. It was an attempt to ensure that individuals appropriately disclosed their international activities and paid the proper taxes on their foreign income.
- System circumvention: Despite the initial introduction of TCS, there were instances of persons evading the tax collection procedure. This was accomplished through a variety of methods, including distributing payments among many individuals, including minors and home employees, and absorbing the 5% tax as a cost rather than claiming it on tax returns.
- Encourage Tax Compliance: The goal of TCS on credit card payments was to encourage people to come forward and file tax returns. Individuals are urged to report their overseas income and satisfy their tax obligations by enforcing a tax collection procedure.
Concerns about TCS on credit card transactions
- Financial Burden Increase: The higher TCS rate of 20% on specific categories, such as investments, presents, donations, and international trips, has raised the financial burden on those who make such payments. Individuals’ disposable income and spending habits may be affected by the higher tax rate.
- Impact on Foreign Travel: Individuals may experience increased charges and may need to change their travel budgets as a result of the implementation of TCS on credit card payments for foreign travel. This may prevent some people from travelling abroad or limit their spending while there.
- TCS adoption on credit card payments presents administrative issues for credit card firms, payment processors, and individuals. It necessitates proper systems for tax collection and remittance, as well as precise reporting and compliance. Meeting these standards may complicate the payment procedure.
- Concerns about Double Taxation: Some people are concerned about the possibility of double taxation. They contend that because they already pay taxes on their income, using TCS on credit card payments is a double taxation on the same revenue.
- Economic Growth Impact: Critics believe that the increased TCS rate and added tax burden on some payments will stifle economic growth. It is feared that this will deter investment, limit foreign spending, and have an impact on industries such as tourism and hospitality.
- Tax Terrorism: The implementation of TCS on credit card payments has resulted in criticism of the broader tax system, with words such as “tax terrorism” being used. Critics argue that the tax collection procedures are excessive and may create a fear and uncertainty among taxpayers.
@the end
Misinterpretation of TCS’s recent declaration regarding credit card payments has caused unnecessary worry and overblown emotions. While issues should be addressed constructively, it is critical to recognise the government’s efforts to streamline the tax system, leverage technology, shorten processing times, and resolve disputes. Collaboration between the government and taxpayers is critical to creating a taxation environment that is fair, simple, and compliant in the country.
Source: https://www.indiatoday.in/business/story/what-is-tax-collection-at-source-liberalised-remittance-scheme-credit-cards-international-usage-2380824-2023-05-18