NEW DELHI: The Union Government will soon come out with ‘an ordinance to abolish the foreign exchange conservation (travel) tax (FECT) levied at the rate of 15% ‘on all dollars sold to travellers going abroad. A decision in principle has been taken to promulgate the ordinance about two weeks after the current Parliament session is over. The present budget session may last till the middle of this month.

A proposal is being finalized by the finance ministry which will be referred to the Cabinet. The ordinance will be issued after obtaining the Cabinet approval.

The proposal will argue that FECT has outlived its utility and its abolition will help further bring down the hawala rate of the dollar Moreover the revenue loss as a result of the abolition of FECT “would be more than compensated by the overall gain in terms of tendering hawala transactions more unremunerated.

The annual revenue from FECT is estimated at Rs 88 crore during 1992-93 compared the Rs 81 crore during 1991-92. The tax was levied with effect from Oct.151987 with the ostensible objective of conserving foreign exchange by making it more costly for travellers abroad. Official sources argue that the continuation of FECT even after the introduction of the liberalized exchange rate management system (LERMS) has become more counter-productive

While under LERMS the dollar can be purchased at the market rate for imports a traveller abroad has to buy the dollar at the market rate plus the 15% tax. Since the hawala rate of the dollar is almost the same as the market rate a traveller abroad is paying more for his dollar. Thus he is encouraged to buy dollars either at the hawala rate which is cheaper.

Moreover as the dollar is being sold against rupee by licensed money changers in many countries the travellers abroad are now taking rupees out of the country and to get them converted in foreign countries. Information available from the government suggests that even in other countries the rate for buying a dollar is cheaper than the market rate plus 15% FECT levied on it.

The abolition of the 15% FECT will thus discourage travellers from buying dollars from the hawala market It will also discourage the flight of Indian rupees to foreign countries argue official sources.

The proposal for abolishing the tax was mooted about a year back.

However the finance ministry had then deferred a decision on it. It was revived when the exercise for formulating the 1992-93 budgets started in November 1991.

The ministry had decided that the abolition would be included in the budget for 1992-93. However the finance minister did not make any announcement to this effect in his budget speech.

There was also a re-thinking in the ministry on the abolition of FECT It was felt that FECT could be reduced from 15% to 5% in view of the revenue loss the government will have to incur.

Article extracted from this publication >> May 22, 1992