MC explains | 20% TCS on international purchases: Credit card purchases when traveling abroad are now exempt, and booking foreign flights and accommodations separately helps reduce the tax burden

MC explains | 20% TCS on international purchases: Credit card purchases when traveling abroad are now exempt, and booking foreign flights and accommodations separately helps reduce the tax burden

The government has made it clear that independent purchases of international airfare or hotel accommodations are not regarded as purchases of international trip packages and are instead covered by LRS.

Rates for tax collected at source (TCS) and new guidelines were effective on October 1.

Indian travelers heading abroad are expected to make adjustments to their yearly winter vacation plans to lessen the impact of increased tax collected at source (TCS) rates and new regulations going into effect on October 1.

As of right moment, using a credit card while traveling abroad is still protected from TCS since the finance minister has not yet specified when these transactions would fall under the purview of the liberalized remittance system (LRS). Furthermore, tax experts claim that you may totally avoid TCS if you book overseas flights and accommodations separately from vacation packages while in India.

Here are some tips for navigating the TCS labyrinth.

Can travelers use credit cards overseas to make TCS-free purchases?

Yes. TCS gave travelers who planned to use credit cards while traveling abroad a break. The government's decision to put foreign credit card spending overseas under TCS was reversed on June 28. Then, according to industry experts consulted by Moneycontrol, this was done as a result of the banks' technological difficulties.

What about credit card purchases made while in India for overseas travel, lodging, foreign magazine subscriptions, etc.?

When a person is in India, according to Riaz Thingna, partner at Grant Thornton Bharat, credit card expenditures that surpass Rs 7 lakh in a fiscal year are liable to a 20 percent TCS fee if they are covered by LRS.

Does TCS apply when you reserve rooms and flights abroad, regardless of the method of payment? Does it matter if the fares/tariffs are expressed in dollars or rupees?

According to Thingna, the government has emphasized that independent purchases of international flights or hotel accommodations are not regarded as independent purchases of international vacation packages and are instead covered by LRS. This implies that once a person spends more than Rs 7 lakh, such purchases are subject to TCS. "In these situations, the AD (authorised dealer) bank, not the airline or hotel, is in charge of collecting TCS while the transfer is being made. The TCS regulations will not be applicable if the payment is made in rupees since it does not qualify as a remittance at all. However, TCS would apply if the website accepts payments in other currencies while the payment gateway only accepts rupees, according to Thingna.

An authorized dealer is any organization that the Reserve Bank of India (RBI) has given permission to do foreign currency business. Typically, this comprises all public sector banks and the top private sector banks.

What is the TCS rate that applies to international travel packages? What are the threshold upper and lower limits?

As of October 1, 2023, individuals who spend up to Rs 7 lakh annually on such packages are subject to a TCS of 5%, while those who spend more than this are subject to a TCS of 20%.

Keep in mind that for the purposes of determining whether TCS is applicable, the threshold for international travel packages and other foreign remittances/spends under LRS must be considered individually.

There is a threshold of Rs 7 lakh for TCS application on LRS (all categories except international travel packages), according to Deepashree Shetty, associate partner, tax and regulatory services at tax consultancy company BDO India. Therefore, once the Rs 7-lakh threshold is passed, certain spending under the LRS would be liable to TCS at stipulated rates. TCS should be applied on all expenditures for international travel packages; it is 5 percent for the first Rs 7 lakh and 20 percent beyond that.

In October 2020, international travel packages were first launched under the TCS umbrella. The whole cost of the package (which includes the goods and services tax, or GST), was to be subject to a flat 5 percent TCS. This was true regardless of how much the bundle cost. Up until September 30, 2023, this persisted. But as a result of the declaration in Budget 2023 and subsequent changes made by the government, TCS on international vacation packages increased starting of October 1, 2023.

Are there going to be many travelers who spend more above Rs 7 lakh on international holiday packages before 20 percent TCS kicks in?

Most Indian travelers won't likely exceed this level, according to Rajiv Mehra, head of the Indian Association of Tour Operators. "Even if they do," he continues, "the cap is per individual, so, say, a couple is traveling abroad, they can spend together up to Rs 14 lakh before 20 percent TCS becomes applicable."

How does a travel company know if you have spent more than Rs 7 lakh?

Le Travelworld's managing director, Sanjay Dang, claims that it is hard to determine whether or not the Rs 7-lakh restriction has been violated. No data or information on how much of a customer's LRS limit has been used is accessible to us. That is the fundamental issue with the whole system.

The Federation of Associations in Indian Tourism & Hospitality (FAITH) board member Ajay Prakash agrees. According to him, "Tour operators have no way of verifying if the Rs 7-lakh limit has been crossed."

According to Shetty, there is no system in place that discloses the specifics of how much a traveler really spends on international excursions. The Central Board of Direct Taxation (CBDT) has thus recommended the possibility of a "undertaking" to be supplied by the buyer/traveler to the seller/tour operator concerning prior remittances paid for international travel. The tour operator would then be able to apply the proper TCS rates.

Our conversations with travel agents revealed that they are collecting customer statements stating that the limit has not been exceeded.

What happens if a false declaration is made?

"The trip operator is responsible for collecting TCS. Sellers who fail to pay TCS may face penalties such interest levied at 1% each month of delay, a fine up to the TCS amount, and legal action with a maximum sentence of seven years in jail, according to Shetty.

She claims that the RBI is creating a mechanism for providing the seller with real-time updates on travel and remittance information. "Until then, the TCS must be collected by the seller based on the buyer's undertaking to avoid the consequences of default," continues Shetty.

Will TCS still apply if I reserve a vacation package via a foreign travel agency like booking.com or Agoda?

No. It only applies to international vacation packages sold by Indian travel agencies, such as Veena World, Kesari Tours, etc., and Indian internet travel agencies, like MakeMyTrip, EaseMyTrip, etc. However, there is no TCS if you reserve a vacation package from a foreign travel agency like Cosmos, Globus, Scanam Tours, Intrepid Travel, etc.

"A firm does not required to collect TCS from an Indian consumer if, for example, the company is situated in the UK and arranges the customer's journey abroad. The Indian government doesn't anticipate them to follow our tax laws, claims Dang.

Mehra claims that the Indian government also loses GST in addition to TCS. Only when the invoicing is done in India is GST paid. According to Indian travel businesses, local tour operators suffer from the absence of a fair playing field.

Can you reserve a trip abroad without paying TCS?

Yes, if you choose not to purchase a vacation package. When overseas travel is booked independently and not as a component of a vacation package, TCS is not applicable. "There is no TCS if someone booked their hotel and airfare separately with us. According to Mehra, there is some demand for these reservations.

Co-founder and CEO of Bookmyforex.com Sudarshan Motwani continues, "The definition of a 'overseas travel package' does not include the simple purchase of an airline ticket or hotel reservation. The TCS rules may change depending on how travelers schedule their foreign travel.

What difficulties do Indian travel providers encounter?

Prakash of FAITH identifies two key difficulties: "First, it is simple to avoid using Indian tour operators by making reservations via foreign travel agencies. Therefore, the business shifts to foreign tour operators even if international travel may continue as before.

The second issue is that tour operators are now responsible for TCS collection. "Not only does this increase our inefficient burden, but we also have no means of knowing how much a particular person spends overall in a year. It will result in needless expenditure and associated legal difficulties. Since nobody gains from it, it may be completely avoided, according to Prakash.