Tax experts are calling for further clarification on the tax collected at source (TCS) on credit card payments in India, particularly in regards to the distinction between business and personal visits. Recently, the Central Board of Direct Taxes (CBDT) issued a notification regarding the implementation of TCS, which applies to all individuals or businesses earning over INR 20 lakh ($29,800) in the preceding financial year. While the practical implementation of TCS has raised several issues, tax experts believe the biggest area of ambiguity facing taxpayers relates to the TCS on credit card payments.
What is TCS?
Tax collected at source (TCS) refers to a tax which is levied by the seller on the buyer at the time of sales. TCS is applied to certain types of transactions, including the sale of luxury goods and certain types of scrap. Under the Finance Act 2021, TCS is now applicable to certain types of payments made using credit or debit cards.
Ambiguity surrounding TCS on credit card payments for business and personal visits
The CBDT has stated that TCS on credit card payments will not apply to business expenses, only personal expenses. This has led to confusion among taxpayers and tax experts, as it is unclear how to differentiate between personal and business expenses, especially when credit card expenditure may apply to both.
In certain cases, individuals may use their personal credit cards to pay for business expenses, while in other instances, businesses may use corporate credit cards to pay for personal expenses, leading to a lack of clarity regarding taxable transactions. For example, if a business executive pays for a meal using their personal credit card while travelling on a business trip, it is unclear whether TCS should be applied.
Experts have criticised the government for the vague nature of the TCS regulations, as taxpayers could potentially be penalised for ambiguous or subjective decisions to levy or not levy TCS on particular transactions. To further complicate matters, the rate of TCS on credit card payments varies depending on whether the payment is made using a domestic or international credit card.
Proposed solutions
Tax experts have proposed various solutions to clarify the distinction between personal and business expenses, including the use of expense management software to categorise credit card transactions, providing taxpayers with clear guidelines on the types of expenses considered taxable, and exempting businesses from TCS entirely.
Another potential solution put forward by tax experts is to introduce a self-declaration mechanism for taxpayers, allowing them to declare whether they consider a particular transaction to be personal or business-related, without fear of penalty for incorrect classification. Additionally, businesses could be exempted from TCS on transactions of a low value, or in cases where the merchant already pays TDS (Tax Deducted at Source) on the transaction.
The impact of TCS on taxpayers
The introduction of TCS on credit card payments aims to increase tax compliance and boost government revenue. However, the practical implementation of TCS has faced several challenges, particularly in regards to compliance costs and the administrative burden on taxpayers.
Taxpayers who are unsure whether TCS applies to their credit card transactions may need to invest in software or engage tax experts to navigate the complex regulations, incurring additional costs. Additionally, the sheer volume of credit card transactions may make it difficult for taxpayers to manually identify which expenses are taxable.
Conclusion
Tax experts have called on the government to provide further clarification on the TCS regulations, particularly in regards to the distinction between business and personal expenses. Proposed solutions include the use of expense management software, clear guidelines on taxable expenses, and the introduction of a self-declaration mechanism for taxpayers. Ultimately, the success of TCS in increasing tax compliance and government revenue will depend on the efficient and effective implementation of the regulations.
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