Every Small Foreign Exchange Spend Will Get Taxing With New TCS Norms

A provision in the Union Budget about tax collection at the source is likely to cause disruption for several individuals when it comes to foreign spending plans.

The high rate of TCS that has been fixed without any threshold limit for expenses other than education means that even for small expenses, there is likely to be a huge percentage locked up in tax remitted to the government. This will include spending related to travel, investment, and even any other small expense made in foreign currency.

While this will be implemented from July 1, it calls for a complete overhaul of planning in the days ahead.

The Provision In Question

Under Section 206C of the Income Tax Act, there is a tax collected at source, which is different from a tax deducted at source.

In the TDS provision, there is an income that is earned from which the tax is deducted. TCS, on the other hand, is done at an expense.

So what happens here is that if you make an expense, a part of it is set aside and sent to the government, and you get the value only for the remaining amount. Expenses under the liberalised remittance scheme, whereby resident Indians can spend $250,000 abroad each year for capital and current account transactions, are covered under Section 206C(1G).

In the case of education spends, if the amount is remitted through a loan, then 0.5% of the amount in excess of Rs 7 lakh has to be collected as TCS, and if the funds are from other sources, then the rate is 5% of the amount in excess of Rs 7 lakh. These two provisions have been left untouched.

What Has Changed

The change that has been proposed in the budget concerns other categories that have been specified under this section. One is related to tour packages abroad.

The earlier rate was 5% without any limit, so the entire tour package would be taxed. This rate has now been raised to 20%. This means that if you are now going on a foreign tour worth Rs 4 lakh, you need to pay Rs 5 lakh because, after the 20% deduction, the final amount comes to Rs 4 lakh.

So, in areas where the final figure is fixed, the additional outlay will actually be more than the headline rate. The real hit would come from the other area, where it is stated that any other expense would be subject to a 20% tax collection without any threshold, whereas previously the rate was 5% with a Rs 7 lakh threshold. 

Investing Gone Haywire

Investors thinking of investing abroad need to completely rethink their plans because a flat 20% of the total investment to be made abroad will be locked up with the government and not be available for use.

So a person planning to invest, say, Rs 50 lakh abroad would now have Rs 40 lakh, with a significant amount of Rs 10 lakh locked up till you file the returns the next year and claim the refund if it is due.

This will make a significantly lesser amount available for investment, so this would need to be considered, but more than that, it can also lock up a huge amount with the government. If there is no other income to offset this tax, the money will be held by the government, lowering the yield on the amount because the interest rate on tax refunds is low. 

Any Other Expense

The other trouble is going to come from any other foreign exchange transaction that you do. For example, consider trying to take Rs 1 lakh worth of foreign exchange for a trip abroad. You will now receive only Rs 80,000 in foreign exchange after the deduction of 20% as TCS. Similarly, if you try to buy a foreign item on a website and pay with your credit card, you will be charged a TCS even if the amount is only $50. This is because all these transactions fell earlier within the threshold limit and hence were not covered.

Now that the threshold has been eliminated, even small expenses in a foreign currency will have TCS involved. 

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.

Arnav Pandya is the founder of Moneyeduschool