TCS on card spending: Banks brace for higher compliance costs

Banks and credit card issuers are likely to see an increase in compliance costs as they implement the 20% withholding tax (TCS) on international credit card spending from July 1. Costs will rise because it is not feasible to monitor the liberalized remittance scheme real-time at the industry level, bankers said.

“The costs of compliance and monitoring will certainly increase. We will automate as much as possible, but there will certainly be operational challenges in the near term,” said Frederick Dsouza, Corporate Head of Credit Cards, Kotak Mahindra Bank.

Banks will be required to pay TCS on behalf of customers even before claiming the amount from them. Complications will arise if customers dispute or later cancel transactions. Operationally, implementation is also not easy, he added.

In May, the Treasury Department amended rules under the Foreign Exchange Management Act to bring international credit card spending under the liberalized remittance regime. As a result, credit card spending to international merchants will attract a TCS of 20%, up from 5% previously.

But payments by an individual with credit cards up to Rs 700,000 per fiscal year will not attract TCS. Expenses for medical, educational and training purposes are also exempt.

The TCS amount collected during a quarter must be deposited with the government within seven days of the end of that quarter. Therefore, the entire amount is a charge on the credit card on which interest is due, says Adhil Shetty, CEO of

“Credit card companies will need to identify transactions that would attract the TCS levy and those that will not, and build a system to ensure compliance in a timely manner,” Amit Jain, head of practice – taxation, BTG Legal, said. “Users will be required to retain all necessary documentation such as invoices, receipts and bank statements to prove that their foreign tour payments have been made under LRS and meet all regulatory requirements.”

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

The convenience of using a credit card will also be compromised, bankers say. Dsouza of Kotak Mahindra Bank believes that credit card customers do indeed have educational challenges and they need time to adapt.

“Credit card users may also be asked to justify the revenue sources used to pay for foreign tours through the card,” says Jain.

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

“Banks will need to upgrade existing IT infrastructure, improve reporting capabilities and train staff to comply with the revised regulations,” said Sajish Pillai, head of assets and strategic alliances, consumer banking group, DBS Bank India. “Banks will have to ensure they meet the exemption criteria for transactions up to Rs 7 lakh per financial year. Therefore, compliance costs for banks and financial institutions may be impacted by recent developments and proposed changes.”

While Indian Banking Association spokespersons were unavailable for comment, bankers believe they should develop customer communication strategies and channels to address any questions or concerns related to the revised regulations.

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