As per law, Service Tax is levied on any service provided or to be provided for a consideration. As Banks & Foreign Exchange Dealers are also providing a service of conversion of one currency into another and charging a commission on the same, Service Tax on Foreign Exchange Conversion is liable to be paid, but Service Tax on Remittance is not liable to be paid.
- Recommended Read: What is Service Tax and Service Tax Rate
In services related to money changing including sale and purchase of a foreign currency, the problem of valuation arises on account of the fact that as per normal trade practice, in such services the consideration is built in the difference between the selling/buying rates and the RBI reference rate for that currency. And therefore the computation of the value of services becomes difficult. In such cases, the Govt has prescribed the following methods for the computation of Service Tax on Foreign Exchange Conversion.
Calculation of Service Tax on Foreign Exchange Conversion
The Government has prescribed 2 methods for the computation of Service Tax on Foreign Exchange, and the service provider is free to choose any method for the computation of Service Tax on Forex Conversion. However, if the service provider opts for any method, he will have to use the same method for the computation of Service Tax on Foreign Exchange Conversion throughout the year and cannot change the method.
Method 1: Abatement Scheme for Computation of Service Tax on Foreign Exchange
The Ministry of Finance vide Notification No. 03/2012- Service Tax dated 17th March 2012 brought some Amendments in the Service Tax Rules. Amongst other amendments, this Notification has also brought an Amendment in Rule 6(7B) which is for the computation of Service Tax on Forex Conversion. As per this Amendment, Service Tax on Foreign Exchange shall be payable as follows:-
|Value of Foreign Currency (in INR)(per transaction)||Service Tax applicable (wef 1stApril 2012)(per transaction)|
|Upto Rs. 1,00,000||0.12% of the amount of currency, subject to minimum of Rs. 30/-|
|From Rs. 1,00,000 to Rs. 10,00,000||Rs. 120 + 0.06% of the amount of currency exceeding Rs. 1,00,000|
|Above Rs. 10,00,000/-||Rs. 660 + 0.012% of the amount of currency exceeding Rs. 10,00,000, subject to a maximum of Rs. 6000|
*Education Cess @2% & SHEC@1% extra
Thus, the maximum amount of service tax payable on exchanging foreign currency has been capped at Rs. 6,000
This method is an easy and convenient way of computation of Service Tax on Foreign Exchange and most of the Banks and Foreign Exchange Dealers are applying this method. The 2nd method has also been explained hereunder for your ready reference.
2nd Method for Calculation of Service Tax on Foreign Exchange Conversion
If a currency is exchanged from or to Indian Rupees then, as per Notification No. 02/2011 dated 1st March 2011, the value of taxable service shall be equal to the difference in the buying rate or the Selling rate, as the case may be, and the RBI reference rate for that currency.
For example: If US $ 100 are sold by a customer @ Rs. 55 per US $ and the RBI reference rate for US $ is Rs. 55.73, then the taxable value shall be Rs. 730 (1000 X 0.73) and service tax @12.36% shall be levied on Rs. 730.
In case, the RBI Reference Rate for a currency is not available, then the value shall be 1% of the gross amount of Indian Rupees provided or received by the person changing the currency.
Service Tax on Remittance
The Ministry of Finance vide Circular No. 163/14/2012-ST dated 10th July 2012 has clarified that there is no liability to pay service tax on remittance sent to India from overseas. Even if any fee or conversion charges are there for sending such monetary remittance to India, no service tax would be levied on such conversion charges as the person sending the money and the company conducting the remittance are located outside India. In terms of Place of Provision of Service Rules 2012, such services are deemed to be provided outside India and therefore there is no Service Tax on Remittance.