Forex Transactions include foreign exchange conversion services as well as cross border transactions including supply of goods and services. Both of these attract GST compliance in the following ways.
Foreign Exchange conversion services
Introduction:
Foreign Exchange conversion services allow users to convert their currencies to other foreign or domestic currencies. They help people turn one type of money into another. It’s like when you have different coins, and you want to change them into bills or swap one country’s cash for another’s. In India there are various governing laws , one of which is Goods and Service Tax(GST) which applies to these currency exchange services.
The payment of GST depends on two ways:
Method 1: Calculation as per Rule 32(2)(a) of CGST Rule 2017
Case 1: When one of the exchanged currencies is Indian Currency (INR)
Sub-case 1: Availability of RBI Reference Rate
The RBI reference rate serves as the benchmark for establishing the currency value differential. When the RBI reference rate is available, the value of the foreign currency exchange is calculated as follows:
For buying foreign currency: Value = (RBI Reference Rate – Buying Rate) * Total units of currency
For selling foreign currency: Value = (Selling Rate – RBI Reference Rate) * Total units of currency
Sub-case 2: Unavailability of RBI Reference Rate
In instances where the RBI reference rate is unavailable for a specific currency conversion, the value of supply is determined as 1% of the Gross Amount (INR) received or supplied in the transaction. For instance, if Mr. Aman is selling or buying 100 USD at an exchange rate of 1 USD = 70 INR, the gross amount involved is INR 7000. Therefore, the value of supply becomes 1% of 7000, amounting to INR 70, with GST on this supply being Rs. 12.6.
Case 2: When both exchanged currencies are foreign currencies
In this scenario, the value of supply is calculated as 1% of the lesser of the final amounts resulting from the conversion of both currencies into INR. For example, if Mr. Aman intends to sell 100 USD for UK Pounds at a rate of 0.82 Pounds per USD, the value would be 82 Pounds. When both currencies are converted into INR, the taxable supply is determined as 1% of the lesser amount, which is 1% of 7000 INR, equivalent to Rs. 70. The GST applicable on this supply remains at Rs. 12.60.
Method 2: Slab-Based Calculation as per Rule 32(2)(b) of CGST Rule 2017
Alternatively, suppliers or service providers can opt for the GST computation method based on Foreign Exchange Conversion that follows predefined rules. It’s essential to note that if this method is chosen, a switch to another method is not permissible for at least one financial year.
1 If Gross Currency Exchange Amount is Up to 1,00,000 Rupees then Value of Supply Formula is 1% of the gross currency exchange amount and Value of Supply Calculation will be Whichever is higher of (A) or (B).
2 If Gross Currency Exchange Amount is Exceeding 1,00,000 then Value of Supply Formula is up to 10,00,000 Rupees 0.50% of (total currency exchange amount minus 1,00,000 Rupees) and Value of Supply Calculation will be A + B.
3 If Gross Currency Exchange Amount is Exceeding 10,00,000 Rupees then Value of Supply Formula is 0.10% of (total currency exchange amount minus 10,00,000 Rupees) + Rs. 5,500 and Value of Supply Calculation will be Whichever is lower of (A) or (B).
For instance, if the gross amount is Rs. 10,000, the value of supply will be higher by 1% of 10,000 (i.e., Rs. 100) and Rs. 500, resulting in a value of supply of Rs. 500.
Cross border transactions
In case of cross border transactions, a business may be required to make or accept consideration in foreign currency. The rate of exchange between the foreign currency and Indian Rupee might vary at the time of transaction of import or export and actual payment/realisation thereof. The said gain or loss is called as foreign exchange gain or loss.
Value of Supply
Section 15 states that the ‘transaction value’ will be the value of taxable supply in case of unrelated person and also in cases where price is the sole consideration for the supply. However, rate of exchange in case of foreign currency transactions is required to be read with Rule-34 of the CGST Rules as mentioned hereafter.
Valuation of a supply is the bull’s eye in case of foreign exchange under GST. Rule-34 of the CGST Rules, 2017 specifies the rate of exchange of currency, other than Indian rupees, for determination of value. It states as under:
“(1) The rate of exchange for determination of value of taxable goods shall be the applicable rate of exchange as notified by the Board under section 14 of the Customs Act, 1962 for the date of time of supply of such goods in terms of section 12 of the Act.
(2) The rate of exchange for determination of value of taxable services shall be the applicable rate of exchange determined as per the generally accepted accounting principles for the date of time of supply of such services in terms of section 13 of the Act.”
Prior to amendment, effective from 27th July, 2017, the above rule stood as follows –
“The rate of exchange for the determination of the value of taxable goods or services or both shall be the applicable reference rate for that currency as determined by the Reserve Bank of India on the date of time of supply in respect of such supply in terms of section 12 or, as the case may be, section 13 of the Act.”
Time of supply and exchange rates
Time of supply provisions holds a significant weightage in the present matter. If we look more precisely on the earlier mentioned provisions under Rule-34, we can say that the custom reference rate of exchange and rate adopted as per GAAP, as applicable, are to be considered on the date of time of supply. Hence, taxable value in INR is to be computed by taking exchange rates as specified on the date of time of supply.
Time of supply, in case of goods, shall be the date of issue of invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice with respect to the supply. In terms of section 31(1) of the CGST Act 2017, invoice is required to be issued before or at the time of removal of goods, where the supply involves movement of goods. Hence, export turnover shall be arrived at by multiplying value of invoice in foreign currency with custom reference rate for the date of issue of invoice.
Time of supply in case of services shall be earliest of the date of issue of invoice or receipt of payment. An invoice is required to be issued within 30 days from the date of completion of services. If the same is not issued in the specified time limit then the time of supply shall be earliest of the date of completion of services or the date of payment, whichever is earlier.
Hence, where advance payment is received for export of services, then export turnover to be considered, shall be determined by multiplying such advance received in foreign currency with conversion rate as per GAAP.
However, where payment is not received in advance, export turnover is to be considered and shall be determined by multiplying value of invoice in foreign currency with conversion rate as per GAAP on the date of invoice. In case the said invoice is not issued within 30 days from the date of completion of service, then conversion rate as per GAAP shall be considered for the date of completion of services.
Further, if payment of service is made under reverse charge mechanism, time of supply shall be the date earliest of the date of payment or 60 days from invoice.
Conclusion
Separate exchange conversion rates for goods and services has been prescribed under the GST law in order to levy GST on the value of supply converted into Indian Rupee. Foreign exchange gain and loss itself does not need any treatment under the GST law as the same is not a supply. However, conversion rate impacts the value of a supply on which tax is to be applied and the same has to be adopted as prescribed in the GST rules. Accordingly, it can be drawn that the foreign exchange gain or loss is a term useful only from the angle of accounting and income-tax and not under the GST law.
****
Authors: Khushi Shah | Associate Consultant. For inquiries, email blogs@bilimoriamehta.com or contact +91 98709 25375.
Author Bio
