The Bharatiya Janata Party-led federal government of India has quietly decided to impose a service tax on foreign remittance fees to India at the rate of 12.36%, which would weigh on the $71bn annual inflows to the largest receiving nation. But even  more than one month after the circular was issued by India’s Central Board of Excise and Customs (CBES), there is no dearth of confusion and uncertainty on how the move will affect an estimated 30mn Indians currently working abroad.

The CBES, India’s apex indirect taxes body, has said no service tax will be payable on the amount of foreign currency remitted to India. However, an Indian bank or other entity acting as an agent to the money transfer will be liable to a levy on its commission.

Let’s see how the new tax will pan out for non-resident Indians (NRIs). Exchange market players say the service tax, on the face of it, will translate into a marginal hike in remittance charges. For example, when an expat remits money from Qatar, the exchange house charges a QR15 fee of which the receiving bank in India gets a portion estimated at Rs100. The service tax at 12.36% will translate into Rs12.36.

Who ill bear the extra burden? Signs are that it will ultimately fall on the remitters. “Depending on the scenario, we expect most exchanges to pass on the burden to their customers,” according to Osama al-Rahma, chairman of the Foreign Exchange Remittances Group, a grouping of over 60 money exchange houses in the UAE.

But here are the larger issues.

The latest move to impose additional burden on NRIs contravene the stated policy of the Reserve Bank of India (RBI) that foreign remittances are export earnings. NRI remittances account for 26.5% of total export earnings of India, according to the RBI handbook.

“The government gives cash incentives and benefits to companies for bringing foreign exchange to India. When it comes to NRIs, no incentives, no benefits,” says Sachin Menon, chief operating officer of tax and regulatory services and national head of indirect tax at KPMG.

The previous Indian government proposed to impose a service tax on remittances in 2012, but strong opposition from the states Kerala, Goa and Punjab forced the government to withdraw the move. NRI remittances account 35%, 21%, 13% respectively of the net domestic product of these states.

India also backtracked in 2012 on a proposal in the Direct Tax Code Bill requiring NRIs to pay taxes on their global income if they stay in their home country for more than 60 days in a financial year.

The remittance service tax, for sure, may not drive NRIs to a doomsday crisis. Suggestions that the new levy might make some of them resort to illegal remittance channels seem a little far-fetched too, as of now.

It is, however, unfair to regard the 30mn NRIs and an estimated 180mn dependent on them as a monolithic segment. According to the World Bank, 95% of remittances are used by the families of NRIs for their upkeep. And an estimated 80% of Indian expatriates in the Gulf are low-paid workers, accounting for most of the remittances from the Gulf to India, estimated at 50% of the $71bn India received in 2013.

NRIs deserve better treatment.

 

 

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