Indian service tax, Omani remittance fee may combine to squeeze forex inflows

The cash-strapped Indian government has imposed a service charge on the commission paid by Indian expatriates on money transfers, hoping to raise around Rs3,700 crore ($6 billion) even as a continued fall in oil prices has forced the Sultanate of Oman to propose a 2 per cent charge on money repatriated by foreign nationals working in the country.

The combined burden of the service tax and the remittance fee could force Indians living abroad, mainly in the West Asia Gulf countries, to look for alternatives. If they feel the burden is too huge, the possibility is that they may look for alternatives, including the illegal hawala route, or even curtail remittances, which in turn would hit the country's forex reserves, it is feared.

India has started levying a service tax on ''fees or commission'' charged by banks and financial institutions for facilitating remittances from abroad, in a move that could drive up remittance costs for Indians abroad, especially in the Gulf region.

Last month, the Central Board of Direct Taxes issued a circular imposing a service tax of 12.36 per cent on the 'fees or commission' charged by financial institutions, banks or agencies engaged in the remittances business for facilitating transfer of money from abroad.

The decision on the new levy comes after the CBDT deferred a similar move in 2012, due to opposition from money transfer agents and NRIs.

''It is a serious issue for the remittance industry and the NRI diaspora. We definitely plan to send a representation to the government on behalf of the industry,'' said Kiran Shetty, regional vice president – South Asia, Western Union Services.

The remittance of money from the UAE to India could costs up to Dh20. A part of this amount is paid to the agents in India, which will attract the new service tax at 12.5 per cent.

For the money transfer agents, including banks, the 12.5-per cent tax on their income would come as a big hit on their profitability and they are now evaluating the option of passing it on to customers.

However, there is not much clarity as to who among the money transfer agent, the remitter, or the beneficiary would bear the burden of the service tax impost.

While the service tax as such could only slightly increase the cost of remittance to India, if the money transferring agents decide to pass on the cost to the customer it would hit a majority of Indians in the Gulf nations who send money to their dependents back home on a regular basis.

Meanwhile, an advisory body to Oman's government has suggested sweeping spending cuts and tax hikes, including a levy on money send abroad by expatriate workers in the country, a large majority of which are Indian nationals.

While the remittance tax would fetch Oman about 62 million rials (about Rs100 crore), a ''fair tax'' on LNG exports would raise an additional 196 million rials (Rs325 crore) while new tax measures would generate another 302 million rials (Rs500 crore).

Oman has been running a small budget surplus so far this year, but the surplus seems unsustainable as the slide in the price of crude oil continues. Oil prices have fallen by 30-35 per cent since June this year and if the fall continues, Oman may well close the year with a deficit.

The service tax and the proposed remittance tax in Oman could increase the cost of remittance to India for Indians living there, the majority of whom are low-income workers.