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The tax collected at source (TCS) of 20% under the Liberalised Remittance Scheme (LRS) that triggered consternation will kick in in another six to eight months since that is the time the Centre has given to banks and credit card businesses to put together a mechanism to collect the tax. According to a report in the Business Standard, the controversial tax has not been put in the deep freeze but merely kept in abeyance to allow the stakeholders to prepare for the collection and reporting of the tax.

The TCS was raised from 5% sharply to 20% for remittance under the LRS in the Union budget of 2023-24. Accordingly, the Centre issued a notification on May 16 that made the new rates applicable from July 1. The necessary changes were made under the Foreign Exchange Regulation Act.

The new rates were applicable to credit card expenditure in foreign exchange without a threshold limit.

The likely change that this might effect is that the tax might be levied from the next financial year instead of the July 1, 2023 deadline as originally announced.

“The Department of Economic Affairs (under the Ministry of Finance) handled the issue and held several rounds of talks with central banks and bankers. Credit card players have also been asked for their input on implementing the said rule,” senior official told the newspaper.

Earlier banks had attracted the attention of the government on the difficulties in quickly complying with the new requirements. The administration has also been flooded with suggestions that there was urgent need to differentiate between personal and business visits. Else, people travelling abroad on business visits would also need to pay the enhanced charges of 20% that would bring unnecessary financial burden on them.

In response to this lack of preparedness on multiple fronts, the ministry said in a notification on June 28 that it would not count international credit card expenditures towards the LRS limit. Therefore, the TCS of 20% would not be applicable to these spends.

Sudhir Kapadia, senior tax partner, EY India said, “Banks have been requesting sufficient time to get their systems updated and insert features for effecting tax collected at source on credit cards. If the road map given by the finance ministry to banks is to put in place the modified system from next financial year (FY@%), it should provide a good runway for banks to implement the new tax collected at source rules.”