New 20% TCS Rule On International Spends Comes Into Effect On Oct. 1 — BQ Explains

Starting Oct. 1, outward foreign remittances could be subject to a higher tax collected at source, or TCS, under the Liberalised Remittance Scheme, when it crosses the threshold of Rs 7 lakh in a particular financial year.

This could even be as high as 20% from the earlier rate of 5%, except in cases where the nature of payment is for education or medical purposes. 

Under LRS, the Reserve Bank of India allows remittances up to $2,50,000 in a financial year. The new TCS rates under LRS, which were first mentioned in the Union budget speech 2023 were said to be mooted after the tax department noted discrepancies between LRS payments of individuals and their disclosed incomes.

While the new rates bring no change to medical or educational expenses, the impact is likely to be felt by those who make investments in assets such as real estate, bonds, stocks outside India, and on tour packages or gifts sent to non-residents.

Section 206C, sub-section 1G of the Income Tax Act, 1961, allows for TCS collection on LRS transactions and on the sale of overseas tour packages.

What Falls Under Medical, Educational Purposes?

According to an RBI circular, medical purposes would extend to include remittances made to cover the actual cost of medical treatment and medication, other related day-to-day expenses, remittances for the purchase of travel overseas tickets of the person to be treated medically, including that of his/her attendant.

Similarly, educational purposes would include remittances made to cover the cost of travel in terms of the purchase of tickets of the person undertaking study overseas, tuition and other fees to be paid to educational institute and other day-to-day expenses required for undertaking such study.

What Qualifies As An Overseas Tour Travel Package?

Answering an FAQ on the various applicabilities, the ministry said that the term 'overseas tour program package' would be defined as, "any tour package which offers visit to a country/countries/territory/territories outside lndia and includes expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or in relation thereto".

Therefore, the individual purchase of an international travel ticket or purchase of only a hotel accommodation, by itself, would not be covered within the definition of 'overseas tour program package'.

According to a departmental circular from the Central Board of Direct Taxes dated June 30, an overseas tour programme package must have at least two of the following:

• International travel ticket.

• Hotel accommodation (with or without food)/boarding/lodging.

• Any other expenditure of similar nature or in relation thereto.

Speaking at a media engagements after the move, Finance Ministry officials have clarified that the TCS is not final in the sense that the taxpayer can claim credit for the TCS paid and treat it as tax payment against regular income and even adjust it against his/her advance tax payments.

However, this does not negate the real-time cash flow consideration that an individual would have to undertake.

With remittances under LRS divided on the basis of a Rs 7 lakh threshold, the applicability of the threshold in various cases was also addressed by the Finance Ministry. These include:

• The threshold of Rs 7 lakh for TCS on LRS applies for the full financial year and is a combined threshold irrespective of the purpose of the remittance.

Therefore, if this threshold has already been exhausted on one purpose, all subsequent remittances under LRS, whether before or after Oct. 1 would be liable for TCS at their according rate.

• The threshold of Rs 7 lakh for LRS is applicable based on remitter and not as per the authorised dealer.

While the facility to provide real-time update of remittance under LRS by remitter is still under development, the ministry noted that individuals can expect an undertaking from their authorised dealer prior to the remittances to declare remittance details previously made in the year. The same can also be expected when one buys an overseas tour programme package.

"lf the authorised dealer correctly collects the tax at source based on information given in this undertaking, he will not be treated as "assessee in default". However, for any false information in the undertaking, appropriate action may be taken against the remitter under the Act, the ministry said in its clarificatory circular.