The finance ministry, in its notification, stated that the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, will incorporate international credit card payments within the LRS. The LRS is a part of the Foreign Exchange Management Act (FEMA) 1999, which outlines the guidelines for outward remittances from India. It is worth noting that all resident Indians are allowed to freely remit up to $250,000 per financial year without informing the Reserve Bank of India.
The recent notification specifically omits rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. This change effectively includes the usage of international credit cards for expenses incurred outside of India under the LRS. The Income Tax Department defines TCS as an additional tax collected by a seller of specified goods from the buyer at the time of sale, which is remitted to the government. Under this system, the person making the payment for specified goods or services is responsible for collecting tax from the recipient and remitting it to the government. The concept of TCS primarily aims to broaden the tax base, prevent tax evasion, and ensure the smooth collection of taxes. In simple terms, it shifts the responsibility of tax collection from the government to the person making the payment.
How TCS Works in India:
In India, the provisions for TCS are governed by the Income Tax Act, of 1961. According to these provisions, certain goods or services are identified for which the recipient is required to pay tax at the time of purchase. The person making the payment is responsible for collecting the applicable tax and depositing it with the government. The person collecting tax at source must obtain a Tax Collection Account Number (TAN) and file regular returns with the tax authorities. The tax collection rate and compliance procedures vary depending on the nature of the goods or services.
Differences between TCS and TDS:
It is important to note that TCS is distinct from Tax Deducted at Source (TDS). TDS involves deducting a portion of the payment made to the recipient and remitting it to the government, whereas TCS involves collecting tax from the recipient at the time of payment. TCS and TDS are both mechanisms used by tax authorities to collect taxes, but they differ in their applicability and the point at which tax is collected. TCS is applicable to specific goods or services as identified by tax authorities, while TDS is applicable to a wider range of payments made to various categories of recipients.
Under TCS, tax is collected by the person making the payment for goods or services from the recipient at the time of purchase or payment. On the other hand, under TDS, tax is deducted by the person making the payment from the recipient's income or payment.
Regarding compliance and reporting obligations, both TCS and TDS require certain procedures. The person collecting tax under TCS needs to obtain a Tax Collection Account Number (TAN) and file regular returns. Similarly, the person deducting tax under TDS needs to obtain a Tax Deduction Account Number (TAN) and file regular TDS returns.
TCS under LRS:
Under the Liberalised Remittance Scheme (LRS), TCS is applicable to specific foreign remittances made by individuals. The LRS permits resident individuals to freely remit a certain amount of money abroad for various permissible purposes, such as education, travel, investment, and gifting. When an individual makes a foreign remittance under the LRS, TCS may be applicable.