Higher TCS on foreign spends: Credit cards exempt for now, book flights, hotels separately to minimise tax impact

Tax collected at source (TCS) rates and new rules came into force from October 1

With higher tax collected at source (TCS) rates and new rules coming into force from October 1, overseas-bound Indian travellers are likely to tweak their annual winter holiday plans to minimise its impact.

For now, credit card spending when present overseas continues to be safe from TCS, as the finance ministry is yet to announce the date when these will be brought under the liberalised remittance scheme (LRS) ambit. Moreover, you can completely escape TCS if you were to directly book international flights and hotels (instead of as part of a holiday package) while in India, in Indian rupees, say tax experts.

Here's help on decoding the entire TCS maze.

Can travellers make TCS-free spends using credit cards while travelling abroad?

Yes. Travellers intending to use credit cards when travelling overseas got a breather on TCS. On June 28, the government rolled back its May 16 move to bring international credit card spending abroad under TCS. Industry experts Moneycontrol spoke with then said this was done due to technical challenges being faced by banks.

What about credit card spends on international flights, hotels foreign magazine subscriptions etc. when in India?

According to Riaz Thingna, partner, Grant Thornton Bharat, when the individual is in India, credit card spends are subject to 20 percent TCS on an amount exceeding Rs 7 lakh during a financial year if such spends are covered under LRS.

Also read | TDS, TCS aren’t money lost forever, you can adjust or claim it back

Does TCS apply when you book international flights and hotels (whatever the mode of payment)? Does it make a difference whether the fares/tariffs are denominated in rupees or dollars?

Thingna says that it has been clarified by the government that standalone purchases of foreign flights or hotel stays are not considered a purchase of an overseas tour package; they are covered under LRS. That means such purchases are subject to TCS once an individual crosses the Rs 7-lakh threshold. “In such cases, it is the responsibility of the AD (authorised dealer) bank to collect TCS while the remittance is being made and not the responsibility of the airline or hotel. If the payment is in rupees, it would not classify as a remittance at all and, hence, TCS provisions will not apply. But if the website is denominating the payment in foreign currency and the payment gateway is accepting payment in rupees, then TCS would apply,” explains Thingna.

An authorised dealer is any entity that has been authorised by the Reserve Bank of India (RBI) to deal in foreign exchange and normally includes all public sector banks and leading private sector banks.

What is the TCS rate applicable for overseas tour packages? What are the threshold limits that come into play?

From October 1, 2023, overseas tour packages attract TCS of 5 percent for someone with spends of up to Rs 7 lakh a year on such packages, and 20 percent once this threshold is crossed.

Note that the threshold for overseas tour packages and for other foreign remittances/spends under LRS has to be viewed separately for the purpose of applicability of TCS.

Deepashree Shetty, associate partner, tax and regulatory services at tax advisory firm BDO India, says, “There is a threshold of Rs 7 lakh for TCS applicability on LRS (all categories except overseas tour packages). Hence, specified spends under the LRS shall be subject to TCS at prescribed rates once the Rs 7-lakh threshold is crossed. In case of overseas tour packages, TCS shall be applicable on all spends—for the first Rs 7 lakh, TCS is at 5 percent and thereafter at 20 percent.”

Overseas tour packages were first brought under the TCS net in October 2020. A flat 5 percent TCS was to be levied on the package price (which is inclusive of goods and services tax or GST). This was irrespective of the cost of the package. This continued until September 30, 2023. But following the announcement in Budget 2023 and subsequent government modifications, TCS on overseas holiday packages was hiked from October 1, 2023.

Are many travellers likely to cross the Rs 7-lakh threshold for overseas tour packages after which 20 percent TCS applies?

According to Rajiv Mehra, president, the Indian Association of Tour Operators, the majority of Indian tourists are not likely to cross this threshold. He adds, “Even if they do, the limit is per individual and, say, a couple is travelling abroad, then together they can spend up to Rs 14 lakh before 20 percent TCS becomes applicable.”

How does a tour operator ascertain whether you have crossed the Rs 7-lakh threshold?

Sanjay Dang, managing director, of Le Travelworld, says, “It is impossible to know whether the Rs 7-lakh limit has been exceeded or not. We don’t have access to any information or database on how much of a customer’s LRS limit has been utilised. That’s the basic flaw in the whole system.”

Ajay Prakash, a board member, of the Federation of Associations in Indian Tourism & Hospitality (FAITH), concurs. He says, “Tour operators have no way of verifying if the Rs 7-lakh limit has been crossed.”

According to Shetty, there is no mechanism that provides the details of the actual amount spent by the traveller on foreign tours. “Hence, the CBDT (Central Board of Direct Taxation) has suggested the option of an ‘undertaking’ to be provided by the buyer/traveller to the seller/tour operator about previous remittances made for foreign travel. This would enable the tour operator to apply appropriate TCS rates.”

Travel agencies we spoke with confirmed that they are taking declarations from clients saying the limit has not been crossed.

What happens in the case of a false declaration?

“The onus to collect TCS is on the tour operator. In case of any default to collect TCS, the seller could attract consequences such as interest levy at 1 percent per month of delay, a penalty of up to the TCS amount, and prosecution with seven years of imprisonment,” says Shetty.

According to her, the RBI is developing a system of real-time updates of travel and remittance information to the seller. “Until then, the TCS must be collected by the seller based on the buyer’s undertaking to avoid the consequences of default,” adds Shetty.

Also read | False declarations to avoid steep TCS could lead to penalties, warn experts

Will TCS apply even if I book a holiday package through foreign tour operators such as booking.com or Agoda?

No. It applies only on overseas tour packages offered by Indian tour operators which include the likes of Veena World, Kesari Tours, etc., and Indian online travel aggregators such as MakeMyTrip, EaseMyTrip, etc. But if you book a tour package with international tour operators such as Cosmos, Globus, Scanam Tours, Intrepid Travel, etc., no TCS applies.

“If a company is, say, based out of the UK and they organise a foreign trip for an Indian customer, they don’t have to collect TCS from them. The Indian government doesn’t expect them to adhere to our taxation rules,” says Dang.

In fact, Mehra says, “Not only is there no TCS, the Indian government loses GST, too. GST is paid only when the billing is done in India.” This lack of a level playing field is detrimental for domestic tour operators, say Indian travel agencies.

Also read |  How to adjust the TCS paid for your foreign tour against your tax outgo

Can you book a foreign holiday without paying TCS?

Yes, if you don’t opt for a holiday package. TCS does not apply when you book international flights, hotels, sightseeing activities etc. separately and not as part of a holiday package. “If someone books flights and hotels separately with us, there is no TCS. We are seeing some demand for such bookings,” says Mehra.

Sudarshan Motwani, Co-founder and Chief Executive Officer, Bookmyforex.com adds, “The definition of an 'overseas tour package' does not enclose the sole purchase of an air ticket or hotel booking. When planning an international trip, how travellers make their bookings can impact the TCS provisions.”

What are the challenges that Indian tour operators face?

Prakash of FAITH highlights two main challenges: “First, Indian tour operators can be easily bypassed by booking the tours with travel agents abroad. So, while travel abroad may continue as before, the business moves to foreign tour operators.”

The second challenge is that the onus of TCS collection has been put on tour operators. “Not only does this add to our unproductive workload, but we also have no way of determining any individual’s total spend in a year. It will lead to unnecessary expense and related legal hassles. It is totally avoidable as nobody benefits from it,” says Prakash.