Paying a price to send foreign earnings home (Riyadh)

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Paying a price to send foreign earnings home
Sachin Menon
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Is the Government’s move to levy service tax on foreign remittance fee justified? Are NRIs paying the price for lack of clout?

June 17, Protected content
The Union Government proposes to charge 12.36 per cent service tax on the fees paid by NRIs sending money to their country. This proposal was introduced indirectly in the Proposed Place of Provision of Service Rules. What does it mean to a labourer in Dubai or an IT employee in Europe or the US? Going by the response of banks and money transfer agencies, this service tax will be deducted from the remittances sent by employees, including many poor labourers, from the Gulf, the US and other places. This approach is the antithesis of the Government’s policy of encouraging exporters, who bring foreign exchange to India. Is the Government’s move to levy tax on foreign remittance fee justified? Are NRIs paying the price for lack of clout, especially as political parties or legislators seldom come to their rescue?

The move is surprising, more so because no such levy is imposed on inward remittances in any other developed or developing countries. The issue has not received due attention as it was introduced through the backdoor, ignoring the likely adverse impact on the nation. Non-resident Indians transfer more than $65 billion annually to dependents in India. These remittances account for more than 3 per cent of India’s GDP and have been instrumental in reducing the current account deficit by shoring up the country’s foreign exchange reserves.

The levy of service tax on money transfer-related services would act as a disincentive for NRI remittances and may lead to reduced inflows. Such a scenario may increase India’s dependency on volatile capital inflows such as foreign direct investment, which witnessed a sharp fall during the global financial crisis of Protected content .

According to an IMF study, NRI remittances are mainly used to provide maintenance support to dependents. According to the Ministry of Overseas Indian Affairs, around 61 per cent of NRI remittances are used for family maintenance.

States such as Kerala, Tamil Nadu and Punjab are among the regions worldwide that depend heavily on international remittance. The share of NRI remittance in the State’s net domestic product is 31 per cent in Kerala, 13 per cent in Punjab and 7 per cent in Tamil Nadu. The remittances provide social security to the dependent families, help them meet basic necessities of life and improve their standard of living. The resultant spend on general consumption helps contribute to the domestic economy by supporting small business. A share of the remittances is also directed towards construction of homes, healthcare and education, thereby generating employment in these critical service sectors. Any reduction in NRI remittances would reduce the disposable income of the dependents and impact development in the respective States.

Migrant remittances have recently surged to the forefront of development agendas worldwide. The urgent need of the hour is to reduce the cost of services provided by banks and other money transfer operators to NRIs; tax incentives for such services would go a long way in achieving this objective. Accordingly, there is need to amend the proposed Place of Provision of Service Rules in line with the global practice of not levying service tax on money transfer service charges. Will our Ministry of Overseas Indian Affairs or the Finance Ministry come to the defence of NRIs, who are an important constituent of our growth story?

Sachin Menon is Partner, KPMG

Keywords: levy service tax, foreign remittance fee, NRIs

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RelatedTOPICSeconomy (general) foreign exchange
economy, business and finance taxation and taxes

Comments:There is a tremendous change in the way of look at the present situation of Indian Economy. The Government is not leaving any scope to maintain minimum standard of living in India. How hardships the NRIs facing and what is the mental trauma they are undergoing when they leave behind their families at least to provide them a Good Education to their children, a house to live etc. If the Government have the guts to stop the Swiss bank deposits and money laundering activities, unwanted expenditures processed by the politicians and their families trips which will curtail by them will definitely improve the Nation. How the Rajagiri and Dadagiri going on which is known by everyone. They don't want to improve the Education system properly.
from: Venkat Parimi Posted on: Jun 18, Protected content 22:23 IST What about the outward remittances made to Swiss bank which amounts for a HUGE....................... sum?
Is it constitutional to tax the remittance made by an NRI? If Income Tax Act does not tax the non-resident income earned outside India, how can Indirect taxes have jurisdiction on this?

Shame on Finance Ministry to trying to bring such unlawful and foolish tax...
from: Kannan Posted on: Jun 19, Protected content 11:02 IST This is the shame on the wisdom of Indian policy makers. Our neighbor even facilitate the free remittances (charge is paid by Pakistan govt) and we are charging a tax on the service offered outside country. It seems Indian Govt has gone mad and this govt MUST go now. At one side they are not able to know who are the Swiss bank account holders, and at other side they want to tax fairly honest NRIs for their hard earned money. I think now this govt has no wisdom, no direction, no vision except the remote control's signal.
from: Anil Kumar Gupta Posted on: Jun 19, Protected content 15:02 IST This is not a provision or policy which is to be welcomed. This would prove another way to retain man power or say un employed youth to reatin in country where they dont have 100% employment state. instead putting burden on common man for taxes they have to strengthen thier policies & practices to retain indian money in india instead routing it to swiss banks.
from: Aashutosh Posted on: Jun 19, Protected content 17:13 IST This is like making a mockery of the entire system, when you are remitting the money it is helping the govt build reserves in foreign currency and they want it to be taxed. It is unbelievable. The govt. till date has not even thought of getting the money which has been stashed away in various foreign banks which itself shows that it is not interested in doing so, they should be following that up and then thinking of utilizing those funds which have been siphoned away not the hard earned money to be taxed. This money goes into maintenance of the family and for various other needs of the family and community as a whole.The various projects which have been funded by NRI are a justification to that..
from: Sanjeev Posted on: Jun 20, Protected content 02:03 IST This is a straight forward theft from people. The politicians have shown that all their proposals are to loot the people. Other proposals too do the same. Only on this occasion it is too visible for everyone to see.
from: Raj Posted on: Jun 20, Protected content 06:26 IST This article is closed for comments.
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