Preparing for Change: Banks Anticipate Compliance Costs with New TCS on Card Spends

Banks Brace for Compliance Costs with TCS on Card Spends

Increase in compliance costs for banks

As the implementation date of the 20% Tax Collection at Source (TCS) on international credit card spends approaches, banks and credit card issuers in India are preparing for the challenges and increased compliance costs that lie ahead. The introduction of the TCS measure from 1 July is expected to have a significant impact on the industry.

Also read: Shocking Secrets Of The New TCS Amendments Revealed!

Operational challenges and increased costs

Industry experts anticipate operational challenges and an overall increase in compliance costs for banks and credit card issuers. Monitoring the liberalised remittance scheme in real-time at an industry level is deemed unfeasible, requiring institutions to invest in automation to the fullest extent possible. However, despite these efforts, there will likely be operational hurdles in the short term.

Complications in compliance and monitoring

One of the complexities lies in the obligation for banks to pay the TCS on behalf of their clients before claiming the amount from them. This situation can lead to complications if customers dispute or cancel transactions afterward. Additionally, executing these regulations poses operational challenges that are not straightforward.

Impact on customers and credit limits

The amended rules under the Foreign Exchange Management Act specify that international credit card spending will attract a 20% TCS, up from the previous 5%. However, individual credit card expenses up to Rs. 7 lakh per financial year, as well as expenses related to medical, educational, and training purposes, will be exempt from the TCS.

Customers exceeding the Rs. 7 lakh limit will face a reduction in their credit limit, affecting their ability to spend. Furthermore, the convenience of using credit cards for international transactions will be impacted, as customers may be required to provide documentation to justify the sources of income used for their foreign tour payments.

Also read: Planning To Send Money Abroad? Know About The New TCS Rate Applicable From July 1, 2023

Compliance and documentation requirements

Credit card companies will need to differentiate between transactions subject to the TCS and those that are exempted. Establishing systems to ensure timely compliance and requiring users to maintain necessary documentation, such as invoices, receipts, and bank statements, will be crucial. Users will need to prove that their foreign tour payments comply with all regulatory requirements.

Modifications to systems and processes

Experts emphasise that banks and credit card issuers will need to modify their systems and processes to ensure accurate and timely collection and remittance of taxes. This will involve upgrading IT infrastructure, enhancing reporting capabilities, and providing staff training to adhere to the revised regulations. Consequently, compliance costs for banks and financial institutions are expected to increase.

Customer communication strategies

In anticipation of the challenges that lie ahead, banks are considering the development of customer communication strategies and channels. This proactive approach aims to address any queries or concerns related to the revised regulations, ensuring customers have a clear understanding of the changes and their implications.

Preparing for the future

As the implementation date approaches, banks and credit card issuers are aware of the need to be proactive in adapting to the new TCS norms while mitigating the impact on their customers. Upgrading systems, enhancing compliance measures, and maintaining effective communication channels will be key to navigating the complexities of the revised regulations successfully.

Also watch: TCS on Foreign Remittance


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