TCS on card spends: Banks brace for higher compliance costs

Banks and credit card issuers are likely to see a rise in compliance costs as they implement the 20% tax collection at source (TCS) on international credit card spends from July 1. Costs will go up as it is not feasible to monitor the liberalised remittance scheme real-time at the industry level, bankers said.

“There will definitely be an increase in the cost of compliance and monitoring. We will automate to the extent possible, but there will definitely be operational challenges in the immediate term,” said Frederick Dsouza, business head – credit cards, Kotak Mahindra Bank.

Banks will be obligated to pay TCS on behalf of clients even before claiming the sum from them. There will be complications in case customers dispute transactions or cancel them subsequently. Operationally too, the execution is not straight forward, he added.

In May, the Ministry of Finance amended rules under the Foreign Exchange Management Act to bring international credit card spending under the liberalised remittance scheme. As a result, credit card spends towards international merchants will attract a 20% TCS, against 5% earlier.

But, payments by an individual using credit cards for up to Rs 700,000 per financial year will not attract any TCS. Also, expenses towards medical, educational, training purposes are exempted.

The TCS amount collected during a quarter should be deposited with the government within seven days from the end of the respective quarter. Hence, the entire amount is a charge on the credit card that will be liable of interest, says BankBazaar.com CEO Adhil Shetty.

“Credit card companies will have to identify transactions which would attract the levy of TCS and those which won’t, and will have to build a system to ensure compliance in a timely manner,” Amit Jain, practice head –  tax, BTG Legal, said. “Users will have to keep all the necessary documentation, such as invoices, receipts and bank statements, to prove that their foreign tour payments were made under LRS and comply with all the regulatory requirements.”

In addition to compliance, credit card issuers are also examining the impact of the norms on customers. Here, customers crossing the Rs 700,000 limit would see a dent in their credit limit and it would have an “immediate bearing” on their ability to spend.

The convenience of using a credit card will also be impacted, say bankers. Kotak Mahindra Bank’s Dsouza believes that credit card customers do have education challenges and they would need time to adapt.

“Credit card users may also be asked to justify the sources of income which have been utilised for payment of foreign tours through the card,” says Jain.

Experts believe that the implementation of TCS norms will require banks and credit card issuers to modify their systems and processes to ensure accurate and timely collection and remittance of taxes.

“Banks will have to upgrade existing IT infrastructure, enhance reporting capabilities and train staff to adhere to the revised regulations,” Sajish Pillai, head – assets and strategic alliances, consumer banking group, DBS Bank India, said. “Banks will need to ensure compliance with the exemption criteria for transactions of up to Rs 7 lakh per financial year. Hence, the compliance cost for banks and financial institutions may get impacted due to the recent developments and proposed changes.”

While spokespersons from the Indian Banking Association were unavailable for comment, bankers feel that they would need to develop customer communication strategies and channels to address any queries or concerns related to the revised regulations.