NRI alert: Your remittance to India is set to get more expensive

Remittances by Indian expats in the UAE and elsewhere in the world may get more expensive after a recent circular issued by the Central Board of Excise and Customs (CBEC) maintains that the commission that overseas exchange houses – such as UAE Exchange, Al Fardan Exchange, Al Ansari and Wall Street, etc. – pay to receiving banks in India (such as, say, ICICI or State Bank of India, etc.) is liable to attract service tax in that country.

The increase, whenever it is enforced, will be marginal as the service tax is not on the amount of money remitted, but on the commission/fees that the overseas service providers pay their Indian counterparties, the CBEC maintains in the circular dated October 14, 2014.

“No service tax is payable per se on the amount of foreign currency remitted to India from overseas,” the CBEC clarifies in its circular. “As the remittance comprises money, it does not in itself constitute any service in terms of the definition of ‘service’ as contained in clause (44) of section 65B of the Finance Act 1994,” the official document adds.

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At present, money exchanges in the UAE charge a Dh20 fee to effect remittance transactions. From this amount, they pay a certain undisclosed sum to their partner banks in India. This is the amount that stands to attract service fees, at the receiver’s end.

“This will certainly be an additional burden on us,” says Pramod Mangat, Vice President, Global Operations, UAE Exchange. “The service fees will be levied on the part of commission we pay to Indian banks and other counterparties,” he says. 

This amount varies depending on the agreement that exchange houses have with banks in India. The current rate of service tax in India works out to 12.36 per cent (flat service tax @ 12 per cent plus education cess @ 0.2 per cent plus senior & higher education cess @ 0.1 per cent). This means that Indian banks or their agents will have to pay that percentage from their commission as service tax.

Clearly, as banks operate, this charge will have to be borne by the overseas exchange houses. This is  confirmed by Mangat, who maintains that UAE Exchange has not yet decided to pass on the additional burden to the customer. 

“We have not decided to pass on the incremental cost to the customer,” he confirmed to this website, and added that a decision will be taken only after assessing the total cost burden on the company. “As of now, we are not going to pass it on,” he said. 

Earlier this year, foreign exchange houses in the UAE had increased the service fees by 33 per cent for remittances to certain Asian countries, including India. The commission went up from the earlier Dh15 to Dh20 in January this year. 

It will indeed be welcomed by Indian expats, especially the majority of blue-collared workers here in the region, if exchange houses decided to absorb the incremental burden of the service charge and not pass it on to the NRIs. 

“The Indian bank or other entity acting as an agent to MTSO [money transfer service operator] in relation to money transfer, facilitates in the delivery of the remittance to the beneficiary in India. In performing this service, the Indian Bank/entity facilitates the provision of money transfer service by the MTSO to a beneficiary in India. For their service, agent receives commission or fee. Hence, the agent falls in the category of intermediary as defined in rule 2(f) of the Place of Provision of Service Rules, 2012,” the CBEC circular clarifies.

“The value of intermediary service provided by the agent to MTSO is the commission or fee or any similar amount, by whatever name called, received by it from MTSO and service tax is payable on such commission or fee,” it notes.

The circular clarifying the burden on remittances supersedes one issued by CBEC in 2012, which categorically said that the commission/fees on remittance doesn’t fall under the country’s service tax regime as the service is provided outside India’s borders.

“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. In terms of the Place of Provision of Services Rules, 2012, such services are deemed to be provided outside India and thus not liable to service tax,” the agency had said in a circular dated July 10, 2012.

This now stands reversed, and agents and sub-agents in India stand to fall under the regime. “Sub-agents also fall in the category of intermediary. Therefore, service tax is payable on commission received by sub-agents from Indian bank/entity,” the agency has said. 

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