Summary: A common GST issue in export of services relates to the correct exchange rate for currency conversion, often misunderstood by professionals. Many incorrectly apply the Customs notified exchange rate, which is applicable only to import and export of goods. For services, the correct provision is Rule 34(2) of the CGST Rules, 2017, which mandates that the exchange rate must be determined as per Generally Accepted Accounting Principles (GAAP) and aligned with the time of supply under Section 13 of the CGST Act. Practically, this means using the RBI reference rate or the bank/spot rate recorded in the books of accounts. This distinction is crucial during GST audits, refund claims, and departmental scrutiny, where mismatches between invoice values and FIRC can lead to delays, queries, or litigation. Therefore, applying GAAP-based exchange rates ensures compliance and avoids disputes, highlighting the importance of understanding specific legal provisions in GST.
A Small GST Doubt… That Many Professionals Still Get Wrong
While reviewing a recent export of services transaction, I came across a very common yet frequently misunderstood issue:
Which exchange rate should be applied for conversion in export of services under GST?
At first glance, many professionals confidently respond:
“Use the Customs exchange rate.”
However, this is where the confusion begins.
The Root of the Confusion
The Customs notified exchange rate is applicable in the context of import/export of goods, not services.
Applying the same logic to services is a common mistake, especially during:
- GST audits
- Refund processing
- Departmental scrutiny
What Does the Law Say?
The correct answer lies in a small but crucial provision:
Rule 34(2) of the CGST Rules, 2017
This rule clearly provides that:
The rate of exchange for determination of value of taxable services shall be the rate determined as per Generally Accepted Accounting Principles (GAAP).
Further, such valuation should be aligned with the time of supply as per Section 13 of the CGST Act.
Practical Interpretation
In practical terms, this typically means:
√ RBI reference rate, or
√ Bank/spot rate used for accounting the transaction
Thus, the exchange rate used in books (as per GAAP) becomes critical for GST purposes.
Why This Matters
This seemingly small distinction can have significant implications, especially in:
Refund of export of services
- Authorities often compare:
- Invoice value, and
- FIRC (Foreign Inward Remittance Certificate) values
Any mismatch due to incorrect exchange rate application may:
- Delay refunds
- Trigger queries
- Lead to unnecessary litigation
Key Takeaway
For export of services under GST, the exchange rate should be determined as per GAAP (Rule 34(2)), and not the Customs notified rate.
Final Thought
Sometimes, GST challenges are not about complexity —
they are about missing a small but crucial provision hidden in the law.
And Rule 34(2) is a perfect example of that.
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