Citizens now have to pay higher taxes on foreign payments due to the proposed four-fold hike on TCS.
If you are finally planning that foreign trip you missed due to the pandemic or looking to support your children’s living expenses abroad, you ought to book the travel package or complete your transactions within the coming months.
From July 1, individuals will be charged 20 percent Tax Collection at Source (TCS) on any outward foreign remittances except medical and education. Altab Kazi, a chartered accountant and chairman of the Institute of Company Secretaries of India, Hooghly Division, said that the proposed reforms will hurt individuals that invest in foreign stocks, and force citizens to spend more on foreign tour packages.
“The decision to increase the TCS on foreign remittances will greatly restrict foreign travel, as tourists may have to end up paying a quarter of the tour package cost on taxes. It may also hurt parents of children that study abroad, as the students, these days often require financial backing from parents in order sustains themselves,” said Altab Kazi.
The four-fold hike in TCS for foreign remittances would increase the overall costs of any foreign outlay. For example, if an individual spends rupees one lakh on a tour package abroad, under the current scheme, he will have to pay five percent Goods and Service Tax (GST) and five percent TCS. Thus, the amount would total up to Rs. 1.1 lakhs.
But under the proposed new scheme, the costs could go up to Rs. 1.25 lakhs due to 20 percent TCS and the existing five percent GST.
Tours and living
“Tourists have appeared hesitant in paying five percent TCS and five percent GST. How are they ever going to pay 20 percent TCS?” said Supriya, owner of a Delhi-based travel agency. “Although this change will not force us to increase prices for international tour packages, the 20 percent TCS will simply discourage tourists from opting for tour packages.”
The proposed 20 percent TCS will also impact parents sending money to their children studying abroad. Atul Sharma, whose elder daughter went to Canada for studies in January 2021, said he had to procure a TCS challan of Rs. 30,000 for a payment of Rs. six lakh. The transaction was taxable as it was not part of his daughter’s educational expenses.
Atul, who had no prior knowledge of the proposed TCS increase for foreign remittances, added, “If they are charging 20 percent now, my daughter should start earning by herself.”
Varun Chandna, a chartered accountant from Delhi, said the idea of TCS in foreign remittances is not a new thing.
“There was TCS on Outward Foreign Remittances for personal purposes under section 206C of the Income Tax Act, 1961 but that was five percent in case of tour packages over a threshold of Rs. 7 Lakhs. In the case of educational fees through a loan, it was 0.5 percent over Rs. seven lakhs which remains the same,” said Varun.
“Now the section is proposed to be amended with TCS rate hiked to 20 percent from five percent and the threshold amount removed except for medical purposes and educational purposes where the threshold of seven lakh rupees is still applicable,” he added.
Foreign remittances in finance is an umbrella term that includes spending on overseas tour packages, foreign stock investments, or even money received or sent by foreign relatives.
There are two types of foreign remittances – outward and inward. Money received from foreign sources is called inward remittances. In this case, the government has decided to increase the TCS on outward payments to 20 percent from five percent, except for remittances on health and education.
Tushar Pathak, another chartered accountant, explained the function of TCS and why it is implemented by the government.
“TCS is always cost-neutral, even in the case of foreign remittances. This means every TCS you pay, you can get it back after filing Income Tax Returns (ITR),” he said.
Tushar explained that the sellers do not get hold of the TCS when selling a product. Travel agencies, for example, usually deposit the TCS amount through a challan within a week of the last day of the month, in which the tax was collected. They do not get to hold the amount themselves.
Even in the case of money transfers, an individual must procure a challan through the online portal called Tax Information Network. Only after receiving the challan, you are eligible to send the money abroad.
Every TCS paid gets reflected in an individual’s Permanent Account Number (PAN). It can then be used against an individual’s tax liabilities, including Income Tax.
For example, a person has paid 20 percent TCS on a transaction of Rs. one lakh and has an overall tax liability of Rs. 60,000. He can avail a concession of Rs. 20,000 on his overall tax liability at the time of filing tax returns, and thus, pay a net tax of Rs. 40,000.
Similarly, if the said person has a tax liability of Rs. 10,000 but has paid 20 percent of TCS on a transaction of Rs. one lakh, he can avail a tax refund of Rs. 10,000. This process makes the TCS a cost-neutral tax.
However, even though the entire TCS can be reclaimed, individuals would have to wait until the tax filing season in order to redeem the amount. Until then, the money will be held up by the tax authorities.
The fourfold increase in TCS collection was aimed at encouraging domestic tourism and preventing money laundering and foreign investments by Indians, said Varun Chandna.
“The government does not want that the Indian money should go abroad and more so when the forex reserves of India have depleted by more than $100 billion in the past six months. The government also wants to promote domestic travel and tourism by discouraging overseas travel,” CA Varun said.
“More so, they know that money going outside India is a prominent means of money laundering too. So all these factors have been weighed in to propose this amendment that increases the TCS rate four folds and has the potential to discourage foreign outward remittances,” he added.
However, Varun suggests that enforcing such a steep TCS could potentially make way for black markets and raise demands for siphoning funds abroad.
“It may be noted that whenever anything is curbed, it creates a parallel market. In this case, it can create a black money market where people buy foreign currency in cash at a premium but without getting identified through TCS,” he said.