Growing credit card usage

Credit card has emerged as one of the most popular banking products for its ease of access to the money, especially in dire circumstances, which it extends to its consumers. It is the card which has actually significantly contributed to lower the usage of cash. In fact, cash used to be king. Just some years back, people used to pay for everyday purchases with cash or with cheques (which are functionally considered equivalent to cash), and would rarely use credit cards for making purchases of goods and services. In other words, infrequent purchases were made by the consumers, if they had credit cards at all.

But the scenario stands changed. An unprecedented boost to the online transactions and significant expansion of e-commerce platforms, especially in the last two years of the pandemic, credit cards became the most sought after cards by the consumers.

   

Remarkably, nowadays with multiple options of making purchases and paying bills online, the consumers have reduced their dependability on the cash and this has stripped cash of the title of ‘king’. Even as debit cards have been an old companion of the consumers and used extensively, it’s the credit card which has reduced the debit card usage considerably.

As everyone knows, a debit card allows the consumer to use his own money in the bank account. While the credit card is bank’s money which is used by the consumer free of interest if the money utilized is paid back within the stipulated time.

Reserve Bank of India (RBI) data shows that credit card payments surged from Rs 6,30,414 crore in fiscal year (FY) 2020-21 to Rs 10,49,065 crore in the first nine months of FY23. In the same period, debit card payments dropped from Rs 6,61,385 crore to Rs 5,61,450 crore.

Data on payments for the month of December over the years provide another indicator of the shift in card usage. Payments through credit cards surged from Rs 65,736 crore in December 2019 to Rs 1,26,524 crore in December 2022 — a rise of over 92 per cent. It was Rs 63,487 crore in December 2020 and Rs 93,907 crore in December 2021.

A journey from being a debit card nation to credit card nation, as mentioned by the RBI, is backed by yet another set of data. The RBI data shows that the number of credit card swipes increased by 20% in the past year, while the number of debit cards declined by 31%.

Reportedly, there are currently 8.5 crore credit cards in India as compared to 7.5 crore last year. Three years ago, there were fewer than 5 crore credit cards.

Yet another trend is catching up fast where companies are entering into tie-ups with banks and other financial institutions, especially consumer-facing apps to boost their businesses. They launch co-branded credit cards by virtue of these tie-ups. For example, some brands like Myntra, Paytm, etc., have recently rolled out co-branded cards with banks such as Kotak Mahindra Bank, SBI Cards. We are expecting a boom in such types of tie-ups where co-branded cards are going to see a significant surge in the card market.

The exponential growth in the credit card numbers as well as transactions is encouraging for the economy, but the consumers have to essentially show a disciplined spending behavior. A credit card, which is technically a revolving loan facility, increases the purchasing power of a cardholder and has the potential to push the consumers into overspending. Reportedly, outstanding amounts were Rs.1.9 lakh crore in March 2023. The situation demands users to strike a balance between enjoying the bounties of credit cards and maintaining disciplined financial habits so that borrowing is not made beyond needs.

Meanwhile, the government’s announcement in May 2023 to levy TCS (tax collected at source) on usage of credit cards in foreign countries had jolted the cardholders as well as the issuers. But, the government has now backtracked from its announcement and decided to defer including international credit card transactions under the Liberalized Remittance Scheme (LRS).

What was the earlier announcement?

On May 16, 2023, the Ministry of Finance issued a notification mentioning the omission of rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, with immediate effect. By virtue of this omission, credit card spending in a foreign currency falls under LRS’s annual limit of $2,50,000 per person. Further, it will be subject to tax collected at source (TCS) which is 20 percent.

The finance ministry while giving reasons behind the move to bring credit card spending in a foreign country under TCS regime said, “Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 2,50,000. The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.”

Notably, Rule 7 of the FEM(CAT) Rules, 2000 exempted the use of international credit cards from the LRS for payments by a person towards meeting expenses while such a person is on a visit outside India.

Later, in a reactionary mode, the rule was relaxed that any international transaction done by an individual using his/her debit or credit card upto Rs 7 lakh will not attract the 20 percent levy. Such transactions, the government clarified, will be exempt from the $250,000 per annum Liberalised Remittance Scheme (LRS) limits. This relaxation does not extend to international transactions charged to institutional or corporate credit cards.

However, this relaxation is not available for any remittances made from India. Thus, any remittance for investment, ticket booking, purchase of goods, payment of subscription fees, etc., continues to be subject to TCS at 20 percent.

It was a move from the government to remove differential treatment between debit cards and credit cards, as claimed by the government, in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.

What is the current status of TCS on credit card usage in foreign countries?

The announcement to charge TCS on international transactions through a credit card was not taken well in the market. The government took stock of the reactions which were all directed against this tax burden. Accordingly, the government on June 28 has decided that transactions through International Credit Cards while being overseas would not be counted as LRS and hence would not be subject to TCS. It has also decided that there will be no change in the rate of TCS for all purposes under LRS and for overseas travel tour packages, regardless of mode of payment, for amounts up to Rs. 7 lakh per individual per annum.

Beyond this Rs 7 Lakh threshold, TCS shall be

a) 0.5% (if remittance for education is financed by education loan);

b) 5% (in case of remittance for education/medical treatment);

c) 20% for others.

For purchase of overseas tour programmes packages, the TCS shall continue to apply at the rate of 5% for the first Rs 7 lakhs per individual per annum; the 20% rate will only apply for expenditure above this limit.

The increase in TCS rates; which were to come into effect from 1st July, 2023 shall now come into effect from 1st October, 2023 with the modification as stated above.

Does the threshold of Rs 7 lakh apply separately for various purposes like education, health treatment and others?

Let it be clear that the threshold of Rs 7 lakh for LRS is the combined threshold for applicability of the TCS on LRS irrespective of the purpose of the remittance. The stipulation is that the TCS is not required if the amount or aggregate of the amounts being remitted by a buyer is less than Rs.7 Iakh in a financial year. The amendment by the Finance Act, 2023 has only restricted it to education and medical treatment purposes.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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