In India, 18% GST applies to forex services. Learn how taxable value is calculated using calculation-based or slab-based methods.
The exchange of one currency for another, essential for global trade and travel, is subject to Goods and Services Tax (GST) in India. This article will explain how GST impacts foreign exchange transactions, detail the methods for calculating the value of supply, and outline the applicable GST rates.
GST on Foreign Exchange Services
Under GST regulations, converting foreign currency for a fee is categorized as a taxable service. Consequently, GST is levied on the service charges applied by banks or authorized dealers for facilitating these currency exchanges. It is important to note that GST is not imposed on the actual value of the currency exchanged, as currency itself is considered “money” under tax laws.
The applicability of GST to foreign exchange transactions is determined by the scope of supply. Services such as buying or selling foreign currencies, transferring funds internationally (e.g., for education or gifts), or adding money to a foreign exchange travel card through a bank or authorized dealer are all subject to GST.
Applicable GST Rates for Foreign Exchange Services
A GST rate of 18% is applied to the service value of foreign exchange transactions. The taxable value for these services is determined using one of two methods outlined in Rule 32 of the CGST Rules 2017: the calculation-based method or the slab-based method.
Financial institutions and authorized currency dealers are required to select one of these valuation methods and consistently apply it throughout the entire financial year.
Methods for Valuing Foreign Exchange Transactions
1. Calculation-Based Method
This method calculates the taxable value based on the disparity between the transaction exchange rate and the Reserve Bank of India (RBI) reference rate. For instance, if a customer sells $10,000 to a bank at ₹85 per dollar, and the RBI reference rate is ₹84.5 per dollar, the taxable service value would be ₹5,000 [(₹85 – ₹84.5) x 10,000]. An 18% GST would then apply to this ₹5,000.
Should the RBI reference rate not be available (as the RBI only publishes rates for a limited number of major currencies), the value of the supply is set at 1% of the total amount received or paid in Indian Rupees.
In scenarios where neither of the currencies involved in the exchange is the Indian Rupee, the supply value is calculated as 1% of the lower amount when both foreign currencies are converted into Indian Rupees. For example, if a company converts US dollars received into British Pounds to pay a supplier, the taxable supply value is determined as follows:
| Detail | USD Received | GBP Converted |
|---|---|---|
| Amount | 20,000 | 15,000 |
| INR Exchange Rate | 85 | 110 |
| INR Equivalent | 1,700,000 | 1,650,000 |
| Taxable Supply Value | 16,500 (1% of the lesser INR equivalent, 1,650,000) |
2. Slab-Based Method
As an alternative to the calculation-based approach, CGST Rule 32 also offers a method to determine the taxable supply value using predefined slabs:
| Converted INR Amount | Supply Value Calculation |
|---|---|
| Up to 100,000 | 1% of the exchanged currency, with a minimum of ₹250. |
| 100,001 to 1,000,000 | ₹1,000 plus 0.5% of the amount exceeding ₹100,000. |
| Above 1,000,000 | ₹5,500 plus 0.1% of the amount exceeding ₹1,000,000, capped at a maximum of ₹60,000. |
For instance, if foreign currencies equivalent to ₹1,500,000 are exchanged, the calculated value of supply would be ₹6,000 (derived from ₹5,500 + 0.1% of ₹500,000, which is ₹1,500,000 – ₹1,000,000). Consequently, GST amounting to ₹1,080 would be payable on this transaction.
Implementing GST on foreign exchange transactions ensures a standardized approach for determining taxable value and the corresponding GST liability. A thorough comprehension of these procedures is crucial for preventing unforeseen increases in transaction expenses and for effectively managing foreign currency operations.
