Introduction to TCS (Tax Collected at Source)
Tax Collected at Source (TCS) is a provision under the Income Tax Act where the seller of specified goods or provider of specified services collects tax from the buyer at the time of sale/rendering of services. The tax collected is remitted to the government.
The objective behind TCS is to collect tax from the buyer at an early stage rather than waiting until the end of the financial year. It helps track business transactions where there are chances of tax evasion. The tax collected by the seller is available as credit to the buyer at the time of filing income tax returns.
TCS was introduced on overseas tour packages in 2020 to keep track of high-value foreign tour packages bought by residents in India. Let us understand overseas tour packages, the evolution of TCS provisions, and recent changes announced in Budget 2023 in detail.
Understanding Overseas Travel Packages
A key question is whether standalone purchases of just air tickets or hotel bookings qualify as overseas tour packages and face 5% TCS.
As per Circular 10 dated 30th June 2023, issued by CBDT, the term “overseas tour program package” has been clearly defined in the TCS provisions. The definition specifies that to qualify as an overseas tour package, it should compulsorily include at least two of the following:
- International Air Tickets
- Hotel Accommodation
- Any other expenses are incidental or ancillary to the tour, like sightseeing.
Or “Any tour package which offers a visit to a country or countries or territory or territories outside India and includes expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or about it.”
Therefore, a standalone purchase of only air tickets or hotel booking is not classified as an overseas tour package based on the above definition. Consequently, such transactions shall remain outside the purview of the 5% TCS levy.
This relieves foreign tour planners and travelers who finalize travel and stay on a component basis due to cost or customization benefits. Individual component costs would remain fully extensible by the person without additional TCS burden.
To illustrate further, consider these scenarios:
- Kumar books a London air ticket worth ₹1.5 lakhs and stays with relatives, so accommodation is not charged. This isolated air ticket purchase does not attract overseas travel package TCS.
- Rajni incurs ₹3 lakhs for a 5-night stay in Singapore plus ₹50,000 for shopping and sightseeing paid to Changi Tours. There is also no overseas travel package; hence, no TCS is applicable.
So, a standalone air journey or accommodation does not qualify as a foreign tour package based on the wording of the updated provisions. This greatly simplifies compliance for travelers who do not take end-to-end package deals, and tour operators also have more clarity on the applicability of TCS based on whether Definition conditions are fulfilled or not.
Evolution of TCS on Overseas Travel Packages
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Legislative History
TCS provisions on overseas tour packages were introduced in the Finance Act 2020, which amended Section 206C to include subsection 1G.
It mandated that the seller of overseas packages shall collect TCS at 5% of the sale value without any threshold limit. This was applicable from 1st October 2020.
The intention was to track high-value foreign remittances made by residents in India to ensure commensurate income tax payments.
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Changes in Finance Act 2023
In Budget 2023, the government made two key amendments to Section 206C (1G), which were to be effective 1st July 2023:
- TCS rate increased from 5% to 20%
- A threshold limit of ₹7 lakhs was introduced. TCS applies on an amount exceeding ₹7 lakhs spent by a buyer in one financial year.
However, a 28th June Press Release postponed the change in TCS rate to 1st October 2023. The ₹7 lakh threshold will continue for determining the TCS rate – 5% or 20%.
Exploring the Recent Changes in TCS
Let us analyze the recent changes in TCS on overseas travel packages and their impact:
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Applicable TCS Rates
| TIMELINE | AMOUNT SPENT | TCS RATE |
| Before 01/10/2023 | Any amount | 5% |
| 01/10/2023 onwards | Upto ₹7 lakhs | 5% |
| 01/10/2023 onwards | Above ₹7 lakhs | 20% |
A flat 5% TCS was applied on overseas packages irrespective of booking amount. Now, bookings above ₹7 lakhs invite a higher 20% TCS.
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Threshold Exemption
The ₹7 lakh limit is an annual exemption per individual buyer. No TCS applies if the foreign package cost is less than this. The threshold helps avoid the TCS burden on small-budget travelers.
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All Modes of Payment Covered
The expanded TCS applies irrespective of payment method – credit card, forex card, cash, cheque, bank transfer, etc. Earlier, credit card payments were excluded.
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Aggregation of Spends
The ₹7 lakh limit applies to aggregating spending by a buyer across multiple overseas bookings in one financial year.
So if someone books packages worth ₹5 lakhs and ₹3 lakhs through two agents, the second booking crosses the threshold and faces 20% TCS.
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Purpose Agnostic
The threshold applies uniformly across travel purposes – holidays, business, education, medical treatment, etc. TCS will depend only on total spending crossing ₹7 lakhs.
Regarding foreign remittances for education and medical treatment under LRS, the TCS rate is lower than 5%, even above ₹7 lakhs.
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Old TCS Rate vs New TCS Rate
| Nature of payment | (1) Earlier rate before Finance Act,2023 | (2) New rate w.e.f 1 October 2023 |
| LRS for education, financed by a loan from financial institution | Nil upto Rs 7 lakh 0.5% above Rs 7 lakh | Nil upto Rs 7 lakh 0.5% above Rs 7 lakh |
| LRS for Medical treatment/ education (other than financed by loan) | Nil upto Rs 7 lakh 5% above Rs 7 lakh | Nil upto Rs 7 lakh 5% above Rs 7 lakh |
| LRS for other purposes | Nil upto Rs 7 lakh 50% above Rs 7 lakh | Nil upto Rs 7 lakh 20% above Rs 7 lakh |
| Purchase of Overseas tour program package | 5% (without threshold) | 5% till Rs 7 lakh, 20% after that |
Compliance and Implementation
The expanded TCS has an operational and compliance impact on Indian tour companies selling overseas packages. Let us understand key aspects.
Capturing Buyer Details
Tour companies must capture PAN details in invoices above ₹7 lakh mandatorily. This enables linking overseas package expenses to the buyer’s income tax return.
Modification of Billing Systems
Companies need to upgrade their accounting/billing software to incorporate differential TCS rates and the detection of threshold breaches.
Training Tour Sellers
Customer-facing staff and travel agents need appropriate training to explain TCS correctly to potential buyers of expensive foreign packages.
Coordinating Remittances
If a buyer purchases overseas packages through different sellers, each may need more visibility. Buyers can provide a common declaration of previous bookings.
Issuing TCS Certificates
Sellers have to issue TCS certificates against tax collected. Buyers can adjust this TCS while filing returns or claim refunds.
Revenue Leakage Risks
Buyers can split bookings among sellers without inter-agency visibility to stay below the radar. A common reporting mechanism is needed.
How do you minimize foreign travel costs under the new TCS Regime?
Here are some tips to minimize foreign travel costs under the new TCS regime:
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Purchase forex before 1st October 2023:
The new TCS rules will apply from 1st October 2023. So purchase forex before that date to save the additional 20% TCS if your forex purchase is above Rs 7 lakhs in a financial year.
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Split bookings into multiple transactions under Rs 7 lakhs each:
If your total forex requirement exceeds Rs 7 lakhs, split it into multiple transactions of less than Rs 7 lakhs each. This will allow you to avoid TCS on at least some transactions.
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Use LRS only up to Rs 7 lakhs annual limit:
To minimize cash blocks, consider other payment methods like credit cards for foreign transactions above the Rs 7 lakh threshold. LRS route attracts a higher 20% TCS beyond Rs 7 lakhs annual limit.
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Book a basic Forex card and upgrade later:
If the initial Forex purchase exceeds the annual TCS threshold, book a basic Forex card and then upgrade/reload it while overseas. This way, only the initial load will face TCS.
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Adjust TCS from your income tax calculations:
Remember that TCS is not an additional cost but is adjustable in your overall income tax calculations. So, you can reduce TCS impact by planning taxes appropriately.
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Avail services once overseas using a credit card/forex card:
Consider booking add-ons like hotel upgrades/sightseeing, etc, by paying in foreign currency once overseas using a credit card. This way, you minimize upfront LRS remittances and save on TCS.
Steps to claim TCS:
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Collect the TCS Certificate from the Tour Operator.
The assisting tour operator provides a certificate in Form 27D at the end of the financial year.
Verify the amount collected as TCS during the year.
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Match with Form 26AS
Cross-check Form 27D details with TCS credits reflected in your Form 26AS.
Report any discrepancies in the TCS amount to the tour operator.
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Furnish Income Tax Returns
When filing the ITR, provide details of the total TCS collection during the year.
Form 16 for salaried individuals would also reflect TCS credit.
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Claim Refund or Adjust Against Tax Liability
If the total TCS deduction for the year exceeds the final tax liability, claim a refund.
Otherwise, adjust to lower the overall tax liability payment.
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Provide relevant TCS documents as proof.
Retain acknowledgments and certificates of TCS paid as supporting evidence.
This may require reconciling with the ITR schedule and Form 26AS credits.
Also Read: Calculation And Payment Of TCS Liability In GSTR-8
Conclusion
The enhanced TCS on overseas tour packages aims to make high-spend foreign travelers pay due taxes. Compliance would mean investing in process/system upgrades and training for tour companies.
Certain open-ended aspects need clarification around aggregation and cross-verification of overseas spending. Expanding the digital travel ecosystem with interoperable data can help plug information gaps.
Overall, the amended provisions appear balanced, safeguarding genuine travelers and foreign exchange outflows. Smooth implementation by both receivers and payers of this TCS would determine its success.
Also Read: GST: Everything You Need To Know
FAQs
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What is the TCS rate on overseas tour packages above ₹7 lakhs bought before 1st October 2023?
Before 1st October 2023, the TCS rate will be 5%, irrespective of the booking amount.
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Does the ₹7 lakh limit apply separately if the travel purpose is education or medical treatment?
No. The exemption threshold uniformly applies to overseas travel packages across all purposes.
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Can an employer adjust overseas package TCS at the time of tax deduction on employee salary?
Yes, the employer can factor the TCS amount based on the certificate issued to the employee and adjust against tax deduction liability.
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How can an individual claim a refund if overseas package TCS exceeds their annual income tax?
Filing income tax returns enclosing the TCS certificate to adjust excess collection against tax liability and claim a refund of the balance.
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Will independent flight and hotel bookings also attract overseas travel package TCS provisions?
No. Standalone flight tickets/hotel bookings do not qualify as overseas tour packages. A combination of at least two qualifying expenses is needed.
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Which part is subject to TCS if a tour package has domestic and international components?
Only the invoice value for the international portion of the package tour is subject to TCS. The domestic portion needs to be covered.
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How can a tour company execute overseas booking through the sub-agent account for TCS compliance?
The tour company directly interacting with the package buyer is responsible for all TCS compliance – collection, remittance, and certification.
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Is TCS applicable if an employer organization books overseas business trips for employees?
No. TCS applies only when individual residents buy overseas tour packages. Official business trips arranged by organizations do not attract TCS.
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Can credit card points redeemed for overseas travel booking also cause TCS implications?
Yes, even overseas packages bought by redeeming credit card points are liable for TCS if the redeemed value crosses ₹7 lakhs in a financial year.
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How do I account for TCS adjustment in case of cancellation or modification of overseas booking?
The travel company can issue a manual TCS revision certificate capturing the correct tax in case of a change in invoice value due to modification or cancellation. Buyers can use this certificate for tax adjustment.
