The Centre on Tuesday decided to garner revenue by indirectly levying service tax on NRI remittances, a move that will eat into the earnings of lakhs of NRIs who regularly send money back home.
In a circular issued by the Central Board of Excise and Customs (CBEC), the government said banks and financial institutions which levy a fee or commission for facilitating the transfer of money from abroad will have to pay service tax.
The circular effectively revises the government decision of 2012 to not levy service tax on NRI remittances.
The circular issued late on Tuesday night by Dr Abhishek Chandra Gupta, technical officer of CBEC, said that banks and financial institutions fall under the category of intermediary as defined in rule 2 (F) of the Place of Provision of Service Rules 2012.
Sachin Menon, chief operating officer, tax and regulatory services, KPMG, said the circular was "completely unfair" to NRIs who send remittances to the country.
"No service provider pays service tax from his pocket," Menon said.
Menon said the move was akin to "picking the pockets of labourers and maidservants" who work abroad.
"Assuming that Rs10 is the additional cost [transaction fee charged by money transfer agent] of every Rs 100 that an NRI sends, now only Rs 98.76 will be received for every Rs100 sent [after reducing 12.36% service tax on Rs10]," Menon said.
Critics also said the move might result in a rise in anti-national activities, with money remitted through hawala as an alternative.
Emerging as the top recipient of money from abroad among developing nations, the country received remittances of $64 billion in 2011, according to World Bank data.
Chief ministers of Punjab and Kerala, states that get the largest remittances, had taken up the matter with prime minister Manmohan Singh when the tax was previously mooted, and the circular was withdrawn in 2012.