The RBI (Reserve Bank of India) has announced a 20-percent TCS (Tax Collected at Source) on the use of international credit cards for foreign travel and transactions abroad which will come into force on October 1.
The imposition of the steep tax would make foreign travel and shopping abroad more expensive. But, the RBI aims to regulate the flow of foreign currency with this move. Under the RBI directive, the tax will be effective on all credit card transactions abroad from October 1.
What is TCS?
Tax Collected at Source will be charged by banks and other financial institutions on behalf of the RBI when a customer makes a payment in a foreign currency. RBI’s rule states that a 20 per cent tax is compulsory for all transactions with an international credit card. For instance, when a person makes a purchase of Rs 10,000 with this credit card, a tax of Rs 2,000 would have to be paid. The bank which issued the credit card would collect this amount from the customer and transfer it to the government. The bank will be charging TCS on each transaction.
Why is TCS imposed?
A major aim of the RBI to impose TCS is to strengthen the mechanism to monitor the outflow of money from the country. TCS will also enable RBI to accurately track the flow of foreign currency. Moreover, the high TCS rate is expected to dissuade people from engaging in international credit card transactions, which would help preserve India’s foreign exchange reserves.
How will it affect transactions?
The RBI’s move would have a major impact on credit card transactions in the coming financial year. During the financial year 2022-23, there was a 47.2 per cent increase in credit card transactions compared to the previous financial year. In fact, people spent Rs 14 lakh crore in total through these transactions.
A steep increase is being witnessed in credit card transactions for e-commerce purchases, foreign travel, shopping and food.
With the rise in transactions close to 50 per cent, the 20 per cent TCS is expected to bring down these volumes considerably. Meanwhile, the government hopes to collect Rs 2800 crore by way of this tax during the upcoming financial year.
