How Will the Service Tax on Remittances to India Affect NRIs Abroad?

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There maybe an increase in remittance costs for NRIs and those planning to remit money from abroad to India. In Oct, the Central Board of Direct Taxes issued a circular imposing a service tax of 12.36 per cent on ‘fees or commission' charged by financial institutions, banks or agencies engaged in the remittances business for helping transfer of money from abroad to India.

How Will the Service Tax on Remittances to India Affect NRIs Abroad?
How Does the Remittance Business Work?

Normally, you have local companies who issue cheques from abroad drawn on Indian Banks, who act as intermediaries for payment in India. This is also true for other forms of remittance like those through RTGS from abroad.

For example, SBI is a major player when it comes to remittance from Oman. Union Bank, Canara Bank, Syndicate Bank and many other government owned institutions have their own managed exchanges in countries in the Middle East.They manage these exchange houses, which are registered abroad and help remittance to India.

What Does the Services Tax Remittance?

At the outset we wish to clarify that the service tax on the remittance to India may or may not affect the cost of NRI remittance from abroad. This is because one cannot be sure whether the service tax of 12.36 per cent would be absorbed by the intermediaries like banks or if they would pass them onto exchange houses abroad who in turn would pass them onto customers. At the moment there is no clarity on the frequency of the tax and applicability as well.

But, one this is clear that the tax is imposed and someone would have to pay for it. Even if the exchange houses absorb the costs of the service tax, which is passed on by banks and agencies engaged in the remittance business, they may keep the daily rates at which they issue drafts and RTGS orders very tight.

For example, if they can possibly issue a draft for Rs 61.10 to the dollar, they might choose to charge slightly more to offset the service charge. Which means while the remittance charge may not be directly levied, the rates to remit may be slightly altered during the day to protect margins. Alternatively, exchange houses abroad may increase service charges to remit from abroad.

It's not clear as yet and we are only speculating as none of the charges so far have been passed on. Who bears it, by how much and what would be its impact on remittances by NRIs would be clear in the next few months.

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Story first published: Wednesday, November 19, 2014, 10:25 [IST]
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