The Finance Minister, Nirmala Sitharaman, in Budget 2023 has brought in significant changes to the Tax Collected at Source (TCS). TCS is a tax where the seller collects the tax amount from the buyer at a specified rate and deposits the same with the Government. The existing TCS under the Liberalised Remittance Scheme (LRS) is 5 per cent on the remittance amount above ₹7 lakh and this rate has been increased to 20 per cent in the current Budget.
This will come into effect from July 1, 2023, and is likely to have a big impact on international travel and investments in overseas stocks. The TCS for overseas tour package which currently stands at 5 per cent will go up to 20 per cent after this change.
This proposed amendment will have a significant impact on overseas investment and the leisure travel/vacations segment will become costlier.
International travel had slowly picked up momentum after the removal of Covid-19 restrictions,. but this increased cost is bound to to hinder the progress. It is pertinent to note that TCS is applicable while booking overseas tour packages through Indian tour operators. An individual who paid a TCS of ₹10,000 for a tour package of ₹2 lakh will have to shell out ₹40,000 after the proposed change.
This definitely will have an impact on the number of outbound travellers and will make several first-time overseas travellers think twice before embarking on an international vacation, more so those from middle-income families. Even though the TCS will be credited to the taxpayers later, it will lead to a higher initial cash outflow.
The proposed changes in TCS may prompt first-time international travellers to have a closer look at domestic destinations.
Apart from the challenges on the international travel front, overseas investments in stocks will also be impacted as initial TCS amount will be higher. If an investor wants to invest in international stocks by converting the rupee to a foreign currency, TCS at the rate of 20 per cent would be collected as the remittance amount.
For example, if an investor wants to invest ₹50 lakh, then the TCS amount of ₹10 lakh would be deducted, and this money paid in taxes as TCS will get adjusted while filing the income tax return (ITR). The proposed hike is likely to have an impact on investment in overseas stocks.
The proposed TCS will affect fintech start-ups assisting retail investors to invest in foreign markets as the funds get locked for a period of time.
Several start-ups enable investors to directly invest in the US stock market and are also in constant touch with the banks to streamline and digitise the process of documentation that is involved.
Apart from that, they also encourage retail investors to indulge in fractional trading wherein if the stock in the US stock exchange is out of bounds for the investors, then they can invest as little as $100, which would a fraction of the original cost of investment. Now with the proposed changes this could become difficult and would further reduce the business opportunities .
Narend and Azmi are finance faculty, Thiagarajar School of Management, and Saravanan is a finance faculty, IIM Tiruchirappalli. Views expressed are personal