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Yogi Zone

Useful articles for your finance management by our team of experts

service tax on foreign remittances nris

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Foreign remittance

If you are an NRI having dependants or Rupee needs in India for which you have to undertake frequent remittances and you are reading this article, then you have more than one reason to worry along with the depreciating dollar!

 

The Government of India has made the following amends to the Service Tax Rules, 1994 and issued a set of guidelines for effective 1st April, 2011 which are called the Service Tax (Second Amendment) Rules, 2011.

  

This is a change from the erstwhile regime which gave an option to the service provider to charge fees on the remittances and levy a service tax of 10.3% on the fees charged. Wherever no fees were charged, the service tax was to be levied at 0.25% of the value of the remittance. Obviously, most remittance service providers chose to levy a nominal fee and charge service tax on the fee, which for most of you would have been inconspicuous on account of its small value.

  

The GoI has recommended 2 methods for levy of service tax. Service Providers are free to choose any one method but need to stick to that method of valuation of service tax for the rest of the financial year.

      

Method 1:

A service tax of 10.3% is to be levied on the spread that a service provider charges on the RBI reference rate. Hence the Taxable Value is valuated as follows: (RBI published interbank rate – Rate of Conversion charged by the bank) * Units of foreign Exchange.

  

Method 2 :

The method 2 is a slab wise calculation of the INR value of the amount remitted. The slabs prescribed are as follows:

(a) 0.1 per cent. of the gross amount of currency exchanged for an amount up to rupees 100,000, subject to the minimum amount of rupees 25; and

(b) Rs. 100 and 0.05 per cent. of the gross amount of currency exchanged for an amount of rupees exceeding rupees 100,000 and up to rupees 10,00,000; and

(c) Rs. 550 and 0.01 per cent. of the gross amount of currency exchanged for an amount of rupees exceeding 10,00,000, subject to maximum amount of rupees 5000:

  

In addition education cess @ 3% will be levied on the service tax. The table below summarizes the Method 2 of valuation

  

Foreign Remittance

  

   

With the complexity of implementing the first method, most service providers have chosen to go with the second method. In the second method, the maximum service tax applicable is capped at Rs. 5,150.

 

Taking Method 2 as the basis for calculation, let’s take three scenarios to assess how to calculate this. The rate of exchange assumed for each of these transactions is 45 (1 USD = Rs. 45)

  

Scenario 1 : You remit USD 500

Equivalent INR Amount: INR 22,500

Service tax applicable: INR 25.75

Amount you will actually get: INR 22,474.25

  

Scenario 2 : You remit USD 10,000

Equivalent INR Amount: INR 4, 50,000

Service tax applicable: INR 283.25

Calculation Methodology:

Rs.100 + 0.05 %*( 3, 50,000) = Rs. 100 + Rs. 175 = Rs. 275

With applicable cess: Rs. 283.25

  

Scenario 3 : You remit USD 10,00,000

Equivalent INR Amount: INR 4, 50, 00, 000

Service tax applicable: INR 5,150

  

This structure is already in force effective April 1, 2011. The next time you decide to remit you may want to check with your service provider on what is the structure they are following and assess the amount you finally get into your account.

       

Written by Daisy Fernandes

  • Arvind

    I am a NRI, I have NRO Deposits in India. I would like to transfer this money to USA. What is normal procedure & what is the service-tax I have to pay. Can I convert this NRO money into NRE/FCNR accounts.
    Please advise soon . Thanks

    • yogiexpert

      You can directly transfer the money from NRO account in India to U.S.A. You would need file forms 15CA, 15CB. A CA can help you in this regard.

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