An Indian MP has sought Prime Minister Manmohan Singh's intervention to put on hold the proposal for imposing service tax on overseas remittances fees levied by banks that takes effect on July 1.
In a letter to the prime minister, Shashi Tharoor, the former undersecretary general, said a more detailed examination of the adverse implications of the move, especially for the millions of nonresident Keralites working in ordinary jobs in the Gulf region, was needed.
"It has generated tremendous resentment across Kerala," Tharoor said. "This is a shortsighted measure which risks diverting remittances to 'hawala' channels and bodyting otherwise law-abiding citizens to indulge in undesirable malpractices. At a time when the country needs to attract inward remittances and investment, any measure which discourages these should not be conbodylated."
India proposes to charge 12.36 percent service tax on the fees paid to banks while sending money back home. This service tax will be deducted from the remittances sent by the diaspora. More than $ 63 billion comes to India annually in remittances which accounts for more than 3 percent of India’s GDP, which greatly helps in reducing the current account deficit.
Home Minister P. Chidambaram, who maintained that he was not aware of the details, said the service tax system was universally accepted but certain sectors are included in the negative list which might have undergone some changes with deletions and additions now.
"There must be a service tax on everything but I don't know how it's going to fall on the nonresident Indians. The finance minister will look into how it is going to impact overseas remittances," he said while addressing a joint news conference with Information and Broadcasting Minister Ambika Soni and Law and Minority Affairs Minister Salman Khurshid.
The service tax was first introduced when Singh was the finance minister in 1994. The Service Tax Rules 1994 was amended last year with a set of guidelines called the Service Tax (Second Amendment) Rules, 2011, which gave an option to the service provider to charge fees on the remittances which attracts service tax.
According to a notification issued this month by the Department of Revenue which phases out the current service tax regime and sets a new negative list for tax exemption, a service tax of 12 percent and an education tax of two percent and secondary and higher secondary education tax of one percent on it are applicable on the bank fees and charges.
This is not the tax on the total amount remitted, as it is being widely spread in the social media. The tax is applicable only on the bank charges which will be passed on to the customers.
However, experts say the levy of service tax on money transfer-related services would act as a disincentive for NRI remittances and lead to reduced inflows, which is falling since 2008 due to economic downturn. According to the Ministry of Overseas Indian Affairs, around 61 percent of the remittances are used for family maintenance.
Shares of remittance in Kerala’s net domestic product is 31 percent while it is 13 percent for Punjab and 7 percent for Tamil Nadu. It is feared that any reduction in NRI remittances would reduce the disposable income of the dependents and impact development in the respective states.