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    20% TCS on international credit card spends: RBI's solution is like cutting off head to cure headache, says tax expert

    Synopsis

    The move to impose a 20% tax collected at source (TCS) on credit card purchases for international transactions, and the inclusion of credit card transactions in tax categories will have an impact on ordinary consumers, not just the rich, says international tax expert TP Ostwal. He added that the significant annual amount spent on foreign travel makes the implementation of this tax burdensome and added a potential extra layer of compliance for banks and the financial sector. Ostwal suggested that any changes should focus on clarifications around existing rules and the imposition of a 5% tax on selected transactions.

    TP Ostwal-1200ETMarkets.com
    5% tax is a rational thing and the $250,000 limit was already there. If some people have misused it, punish them rather than punishing the whole nation with additional burden and additional process of law, says TP Ostwal, international tax expert.

    How do you see this move of credit cards getting into the tax category and 20% of TCS being levied on credit cards being used for international purchases? Do you support this move by the government or do you feel that it cannot have an impact on demand because it is like taxing the rich?
    This is nonsense to say they are taxing the rich. This is taxing the common man. Everybody has a credit card and a lot of people travel abroad. At times, even in a foreign country, one buys railway tickets through credit card. You make hotel payments in credit cards. Now international credit cards are available to everybody. Almost all the banks issue international credit cards which can be used abroad.

    So to say that this is going to be only taxing the rich is not correct. Take the case of a company like Infosys or HCL or TCS which has a huge number of employees working abroad. A company like TCS has 6 lakh employees, out of which one and a half lakh to two lakh employees must be working abroad. A company may authorize employees who are deputed abroad to spend the money first and then claim reimbursement based on the allowances given to each of the employees.

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    If that is the case and if the expenditure is incurred first by the employee on their own personal cards and then reimbursed by the employer, withholding tax takes place from their individual credit card, unless the company gives them corporate credit cards. Now corporate credit cards are given only to a few senior executives, not to all the employees. Therefore, if you incur the expenditure on the corporate card given to you, that will be business expenditure and there will not be any TCS at all.

    But if the employee incurred the expenditure out of their personal credit cards and then get reimbursed by the employer, there will be a huge loss – 20% – and then they will have to claim this 20% out of their taxable income on the return file and then they take a refund from the tax department. These are the practical difficulties. It is not that a small segment of the taxpayers are going to be affected. A huge number of employees are going to be affected.

    Those who are traveling abroad for medical purposes and for education, even if they are incurring the expenditure through the credit card, no doubt they will be liable for this 20% tax. Most of the Indian students who go abroad, have their credit card, which is issued to them by their banks in India and they use those credit cards abroad. If that be the case, then there will be a TCS also.

    Technically speaking, there should not be any TCS because they are non-residents. Once you become non-resident and you are allowed to use your Indian bank account and are issued credit cards by an Indian bank abroad, you are allowed, foreign exchange law permits that. If that is the case, why should there be a withholding tax on that payment made by the credit card issued by an Indian bank? So there are practical issues.

    The problem which the Reserve Bank of India is trying to resolve without any application of mind, just thinking that it is a magnanimous problem, what is the total amount spent on LRS? In the last 10 years, statistics show around $300 billion has gone from the country for the purpose of LRS. Per annum, therefore, it is not exceeding $30 billion. Our reserves today are $600 billion. We are talking not even 2% of that.

    Therefore, it is a chicken-hearted mind which has worked on such a type of law and such a difficult position which is administratively going to be a major issue. Let me give you another example. The husband is in India. The wife is working abroad or the husband is abroad and the wife is in India. They have a joint account here. Or the wife is working, the husband is also working and the husband has a joint account and joint credit card, add-on cards are given.

    An Indian bank happily gives you the card. The add-on card is given to a person who has become non-resident. If the add-on card of the first holder, who is a resident Indian, is used for making payments in the foreign country, that will be subject to TDS of 20% here. These are the difficulties. The Reserve Bank should have consulted people and should have at least thought about the difficulties which are likely to arise.

    Industry experts, especially travel agencies who make the arrangements of foreign travel, have highlighted that in the past when 5% of TCS was levied, it had no impact. It was a chatter for some time around but it got absorbed. Now with 20% TCS being levied, do you expect that there could be any impact on demand?
    Even 20% will get absorbed and that will be justification from the government. The government will say that I am deducting, I am asking you to collect tax at 20% but this tax we are giving you credit in your return of income. So you pay less advance tax. I can understand if I am a professional and my tax is collected, I will get the credit in my return of income. But consider a poor salaried employee who will be subject to TDS by his employer while calculating his emolument for the whole year and the tax is deducted at source.

    Again, in such cases, if the expenditure is incurred by them and for which he has claimed reimbursement from the employer which is in foreign currency, then there will be 20% TCS. It means that he has to file his return along with that claim and wait for the refund. It means further funds are blocked.

    It is true getting a refund from the government is not difficult these days because the government has expedited the process. But why should I be subject to further TCS provisions? If the government is given full liberty to do anything and everything, they will extend the area of TCS on a number of other items also as well in the future.

    There also has been a limit because any foreign remittance or purchase made over and above a limit of $2.5 lakh would require a prior approval from the RBI. That is also being talked about after the 20% levy of TCS. Was this limit really required and is this $2.5 lakh justified and how big a chunk of population could impact with this kind of a limit?
    First part of the question is very relevant. The limit per individual is $250,000. There are also instances which have come to the Reserve Bank of India's attention that people spend money through the credit card abroad and that do not get counted in that $250,000 and there was no check and balance to catch them.

    If you have a headache, cutting off your head is the kind of solution the Reserve Bank of India has thought of which is not the correct way. You find out a mechanism, you stop the expenditure in this manner. First of all, they did not so far put restrictions on international remittances for payment by credit card. All other payments are subject to TCS, which people have no problem with.

    Even if you have taken 5% TCS on this credit card payment to start with, people would have absorbed that and thought that they will get a refund as the amount blocked is not very heavy. Normally a person can spend at most Rs 10 lakh per annum on foreign trip. A poor man will not spend more. So, 5% of 10 lakhs of rupees will be hardly Rs 50,000. He will get the refund when he files the return of income. If he is a businessman, he will pay that much lower tax and therefore will get the refund automatically before filing the return itself by way of an adjustment against the advance tax.

    But the process is so cumbersome, you have to keep track of it. A banker will have to deduct withholding TCS and pay to the government. They have to file the annual separate returns. You will also have to report in your AS26.

    The government today has a mechanism of complete control over the digitisation of everybody's transactions, all the transactions are tracked and the information system is generated so that before filing your return, all the information of all your transactions is thrown by the system on you and you have to reconcile and file the return accordingly. Why should there be restrictions? Why should there be a mechanism like this? I think you should track your system.

    It means either the government believes that their employees are not working and therefore they have created a mechanism of this nature. Apart from the normal systems which the government has been using for tracking the taxpayer, there is also data analytics done by companies like Larsen & Toubro Technology and other companies on the private data of the transactions of various taxpayers.

    From that, they find out how much transactions people have undertaken, how much TCS has been paid, how much TCS is required to be paid, everything is available and totally under scrutiny. So, if the revenue officers are not willing to do the work, you are thrusting the job on the taxpayers and putting them into difficulties.

    I am sure the attention of the prime minister has not been drawn on this particular subject and resolution on this subject is bound to come up sooner than later. I have confidence in this government that they will resolve the problem.

    You were mentioning that a lot needs to be done but there is a lot of added burden when it comes to the consumer side because they have to go back and file their ITR with all those details. Do you see this as an added burden of compliance with the other parties involved such as the financial or the banking sector?
    It is 100% additional burden on banking circle, it is 100% additional burden on the credit card companies and on the individual because he has to file his return by comparing all the transactions which are reported in AS26 and his chartered accountant will spend a lot more time on the filing of his tax return. So, he will definitely ask for a higher fee for filing his return and there is always a threat from the income tax department that the job has not been done properly and penalty may be levied and prosecution initiated. Do we have a number of Arthur Road type jails in India where one can put a lot of people in jail for making some small mistakes and these days in day-to-day practice, such notices are being issued rampantly without application of mind.

    What amendments would you like to recommend in this particular scenario of 20% TCS?
    Reserve Bank of India should provide clarity and say that this $250,000 limit will include all your expenditure incurred through the credit card and therefore, please report the figures properly and while spending the money consider this $250,000 including the expenditure through the foreign exchange credit cards. Therefore, if that is introduced, 5% tax will be levied on that expenditure; matters will be resolved and people will comply.

    Today also people are complying and they will stop bothering about it. 5% tax is a rational thing and the $250,000 limit was already there. If some people have misused it, punish them rather than punishing the whole nation with additional burden and additional process of law.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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