Unkindest Cut: Remittance Tax to Bleed NRKs of 780 Crore

NRIs, including those from Kerala, are set to fork out `3,694 crore, thanks to a 12.36 per cent service tax imposed on money transfer operators by the Central Govt on remittance to India

Published: 11th November 2014 06:02 AM  |   Last Updated: 11th November 2014 08:26 AM   |  A+A-

KOCHI: In a major jolt to the Non Resident Indian (NRI) community, the Central Government has quietly imposed a 12.36 per cent service tax on remittance to India, a move that would take away about Rs 780 crore of NRK deposits that makes their way into Kerala, going by 2013 figures. The NRIs, including those from Kerala, are set to fork out Rs 3,694 crore.

Tax.JPGThe new tax, which came into effect through a new circular from the Central Board of Excise and Customs (CBEC) would affect Kerala the most as remittances from NRKs account for nearly 35 per cent of the net domestic product of the state.

For the year ended March 31, 2014, foreign remittances into Kerala stood at Rs 90,000 crore. The average remittance cost charged by Money Transfer Service Operators (MTSO) is 7 per cent, according to a study by consultancy firm KPMG.

So what is subject to the new 12.36 percent service tax would be on Rs 6,300 crore (7 per cent of Rs 90,000 crore), which would add up to Rs 780 crore.

In the coming years when Goods and Services Tax (GST) would be introduced, the rate of service tax would go up to 16-20 per cent, affecting the NRI earnings further.

K C Joseph, Minister for NORKA (Non Resident Keralites Affairs) said he was aware about the development and promised steps to address the situation. “We will take up this issue with the Central Government,” he told Express.

The new tax is unfair to the Non-resident Keralites,  a large number of whom are doing menial jobs in West Asia to support their families back home, said experts.

“The NRI community which bailed out our country from forex crisis from time to time, deserved better treatment from the government. It is beyond doubt that the service tax levy would increase the cost of NRI remittance to India and ultimately the cost will be borne by the NRI population,” said Sachin Menon, Chief Operating Officer, Tax & Regulatory Services and national head, Indirect Tax at KPMG.

The government’s move to impose additional burden on NRIs runs completely against the stated stance of Reserve Bank of India (RBI)  that foreign remittances are export earnings (i.e. export of human resources). As per RBI handbook, NRI remittances account for 26.5 per cent of total export earnings. Significantly, companies get benefits amounting to 10-15 per cent of the export earnings that they receive under various schemes.

“Government gives cash incentives and benefits to companies for bringing foreign exchange to India. When it comes to NRIs, no incentives, no benefits! If government is not ready to incentivise the NRIs, least they can do is not to penalise NRIs through an indirect service tax,” said Menon.

“The circular levying service tax is legally incorrect, completely out of sync with the Prime Minister’s stated objective of unearthing black money. This levy will drive otherwise law abiding NRIs to illegal hawala channels,” he said.

During the UPA regime too there was a proposal to impose the service tax on remittances in the union budget of 2012 but strong opposition from Kerala, Goa and Punjab forced the government to withdraw the move. Remittances from NRIs account for 21 per cent and 13 per cent of net domestic product of Goa and Punjab respectively.

At that time, the matter was examined and it was clarified that there is no service tax per se on the amount of foreign currency remitted to India from overseas. In the negative list regime, it excludes transaction in money and thus not subjected to service tax.

In case of any fee or conversion charges are levied for sending such money, they are also not liable to service tax as the person sending the money and the company conducting the remittance are located outside India. In terms of the Place of Provision of Services Rules, 2012, such services are deemed to be provided outside India and thus not liable to service tax, it was pointed out at the time.

Though nothing in law or in the rules have been changed in the last two years, the new government has simply reversed the earlier circular without any reason and imposed tax on NRI remittance fees.

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