by Moiz Mannan
Those who play around with trillions are saying it’s just a few rupees more to pay for expatriates sending money home to their families. They’d do well to ask the housemaid or the driver how much it means to them.
After having jettisoned the move to tax remittance services in 2012, the Indian authorities have again decided to levy a 12.36 percent charge on the services provided by India-based operators to their foreign correspondents.
In a circular, the Central Board of Excise and Customs (CBEC) said banks and financial institutions which levy a fee or commission for facilitating the transfer of money from abroad will have to pay service tax. It is obvious that the service providers will pass on the charge to their customers, ie, the migrant workers sending money home.
A little over two years back, the proposal for the new tax was introduced through the Proposed Place of Provision of Service Rules. There was a hue and cry raised by NRI organisations across the world, particularly those in the Gulf, and ‘well-meaning’ politicians in India. Social networking sites were agog with protests against the proposed charge on remittances that overseas Indians send home.
Leaders from the major manpower exporting states had joined the anti-tax chorus. Former union minister and Thiruvananthapuram MP from Kerala, Shashi Tharoor, a member of the ruling party then, had shot off a letter to the prime minister to stay the measure. Kerala Chief Minister Oommen Chandy, who personally met the then prime minister, Dr Manmohan Singh, had claimed to have won a respite through that meeting. He told the media later that the prime minister had “dismissed the reports” about the new charge and sought relevant details from the Finance Ministry.
The local economies of several states, including Kerala, Andhra Pradesh, Goa, Tamil Nadu, Karnataka, Gujarat and Punjab, depend heavily on remittances from abroad. Besides, the NRIs and their dependents also form a major political resource for parties and leaders.
Interestingly, the last time the service tax on NRI remittances was proposed, Punjab politician and the minister in-charge of NRI affairs in the state, Bikram Singh Majitha, had severely criticised the proposal by the Congress-led United Progressive Alliance (UPA) government. Giving the issue a political twist, Majitha claimed it was a ploy by the ruling alliance to target the Punjab and Gujarat where non-Congress parties were in power.
Majitha had described the move as counter-productive as it would hamper the flow of remittances to the country as well as give a fresh lease of life to the illegal ‘hawala’ system of money transfer.
Following the protests, the government of the day had issued a clarification. “The matter has been examined and it is clarified that there is no service tax per se on the amount of foreign currency remitted to India from overseas,” the Central Board of Excise and Customs (CBEC) said. It added, “remittance comprises money, the activity does not comprise a ‘service’ and thus not subjected to service tax.”
In case 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, the circular issued by the Board had said.
The CBEC further clarified that an Indian bank or financial institution which charged the foreign bank for the services provided at the receiving end, was not liable to service tax.
And so, one wonders, how that interpretation has now changed and why? In its new circular the board says that an Indian bank or other entity acting as an agent to money transfer service operator, facilitating in the delivery of the remittance to the beneficiary in India for a fee will be liable to pay tax.
Ironically, the tax is being levied at the time when India has retained its top spot with $71bn remittances this year. Globally, The growth rate this year is substantially faster than the 3.4 per cent growth recorded in 2013, driven largely by remittances to Asia and Latin America, the World Bank has said. The bank estimates remittances to developing countries will continue climbing in the medium term, reaching an estimated $454bn in 2015.
The expansion in South Asia region is being led by flows from the Gulf Cooperation Council countries, where skilled and unskilled workers are finding renewed job opportunities.
Remittances sent home by migrants to developing countries are equivalent to more than three times the size of official development assistance. According to World Bank studies, remittances generally reduce the level and severity of poverty and lead to: higher human capital accumulation; greater health and education expenditures; better access to information and communication technologies; improved access to formal financial sector services; enhanced small business investment; more entrepreneurship; better preparedness for adverse shocks such as droughts, earthquakes, and cyclones; and reduced child labour.
Remittance costs have fallen steadily in recent years, but they remain high in certain regions. World Bank estimates tell us that reducing the average remittance price to 5 percent, in line with G8 and G20 targets, could save migrants around $14bn a year.
The Peninsula
