The point of all this is that Karsites have the inability to use magic as a racial trait.
Meaning that even if the spellcaster has all of his slots remaining, he can't do a thing with them. He would even lose many of the feats that require spell-slots to work, as he can no longer cast spells.
Anyway, this is more of a humiliation tactic, and a scare tactic for other casters, because, you know, there are ways of hiding which spell you used, as has been pointed out.
Remember, why kill someone immediately when you can utterly humiliate them first?
Besides, if you can hit them with Alter Self, they do not get a save, do not have to be willing, don't get SR...
And with those crawling tattoos, I can see an StP Erudite doing this at 5th level, taking out casters of higher level, because seriously, who is threatened by freakin' Alter Self?
And as for the ability, here is the quote from Realmshelp:
Spellcasting Inability: A karsite cannot cast arcane or divine spells, even if he takes levels in a class that grants spellcasting ability. He can use spell-like abilities, psionic powers, and magic items normally.
