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 2008.

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

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