In today’s Finshots, we explain why the government is introducing a new set of taxes on foreign travel.

The Story

“More than 3 crore went abroad for business or as tourists…But the situation is such that out of a population of more than 130 crore, only 1.5 crore have paid income tax.”

That’s what Prime Minister Narendra Modi said in 2020.

Cut to today and the government has decided to take matters into its own hands to fix what it thinks is a problem. It’s not going to wait for these tourists to come back and file their taxes. Rather, starting from July, it’s going to collect a massive 20% tax as soon as one of these tourists swipe their credit card outside of India.

Yup!

How will this work?

Hypothetically, let’s say you travel to Europe and want to buy a pack of chewing gum. It costs a euro or ₹90. You swipe your credit card and go about your day. At night, when you look at your unbilled transaction, you find there’s an additional charge of ₹18 too. There’s a note next to it — “Towards Tax Collected at Source (TCS)”.

Basically, the government asked the bank to do the dirty work, track your spending, and collect a tax whenever you spend money abroad. The bank takes the tax and gives it straight to the government.

It’s not an income tax. It’s an expense tax!

Now let’s make one thing clear. This decision wasn’t really shocking. Because the government has been on a TCS spree of sorts. They’d already upped the tax from 5% to 20% if you were sending money abroad (or using a debit or forex card even). But in order to bring credit cards into this ambit, it first had to tweak a two-decade old law.

You see, we Indians can’t simply take dollars out of the country. We have to abide by the Liberalized Remittance Scheme (LRS) with a $250,000 cap each year. If you spend more than that outside the country, you need permission from the Reserve Bank of India. However, all these years, credit cards were exempt from this rule. It wasn’t an oversight. It was a special exemption listed as Rule 7 in the lawbook. But this allowed the ultra-rich to go shopping using their credit cards outside of India and get away with the $250,000 limit.

So the government asked the RBI to tweak the rule. Because why should credit cards have all the fun, right?

But this is going to have a ripple effect now.

Firstly, imagine the headache for banks. Card transactions aren’t like sending money via net banking. Each time someone swipes a credit card, it adds to the banks’ compliance to-do list. A coffee at 8:00 am, a sandwich at 9:00 am, a pack of gum at 11:00 am — each time, the bank’s systems have to kick into action. They need to rejig a few things to make sure that the tax is collected in an orderly manner as prescribed by the government.

Then, there’s you. Everything is now more expensive and there’s an opportunity cost too. For instance, if you travel outside and swipe your card for ₹3 lakhs, you’ll end up giving the government an extra ₹60,000 immediately. And that money is set aside for a while until you claim it back. You could’ve invested this money elsewhere. But alas, that won’t be possible now.

The one clear winner is the government. For them, it is a bonanza. See, between April and February of FY23, we spent over ₹90,000 crores on overseas travel. This was 100% more than the previous year. Imagine a 20% tax collected on this spending. That’s a lot of money.

Now the government will not be able to keep all of this money. They will have to refund some of it in case you don’t fall under the 20% tax slab. But, if you’re a salaried individual your money will be tied up until you adjust it against your tax liability when you file your returns. If there’s a refund involved then you will have to wait some more time for the government to process it. For instance, if you travel in July 2023, the refund will only hit your account in say August 2024.

Retired folks with no tax liability may also have to bear the consequences as they have to set aside larger sums of money to simply go on vacation. Then they wait for the refund too.

But wait…doesn’t the government also have to pay interest with the refund?

Well, Gautam Nayak of CNK & Associates LLP points out, the interest calculation only comes into effect for a very short period — “only from the beginning of the next [financial] year till the date that he [the traveller] gets his refund.”

No wonder then that the government has increasingly been relying on taxing people at source. In fact, 40% of its total tax collection these days comes from taxes collected at the source. They want the money. And they want the money now!

Anyway, before we wind up, there’s one last thing to address. Remember how we started the story — the quote from Narendra Modi who couldn’t believe that there was such a wide gulf between those who travelled internationally and those who paid income tax?

Well, while it might seem like a genuine problem, it isn’t really that surprising.

Say you’re young and earn ₹6 lakhs per year. You save up money for a couple of years and now you have ₹2 lakhs to finally take that 2-week trip to Vietnam. You’re an international traveller. But, as per the latest tax rules, you don’t have to pay any income tax. Your income is below the taxable limit.

Paradox solved.

But now, as a non-income taxpayer, you’ll still end up shelling out 20% tax. And then you’ll have to patiently wait for the refund to hit your account. It’s not a great feeling.

Until then…happy travelling!

PS: The only two categories that get an exemption from this massive increase in TCS are if the transactions are for education and medical reasons. In these cases, the TCS remains at 5% over a threshold of ₹7 lakhs. And if it’s an education loan, it’s even lower at 0.5%.

Also, will TCS be applicable if you sit in India and use your credit card to make an international purchase? Say a subscription to ChatGPT? Well, if the purchase is in any other currency other than the Indian rupee, then yes, there will likely be a TCS. But if you're buying a subscription to Spotify or Netflix and you're charged in rupees, then there won't be a TCS on that. Business transact

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