CA Pradeep Jain & Sukhvinder Kaur, LLB[FYIC]

With effect from 16.05.2008, the services pertaining to purchase or sale of foreign currency, including money changing was brought under service tax. The authorised dealers in foreign exchange or authorized changers were also covered. The Authorised money exchanger was required to be authorised under Section 10(1) of the Foreign Exchange Management Act, 1999 to deal in foreign exchange or foreign securities. Thus, the authority from Reserve Bank of India was a pre-condition for treating a foreign exchange broker as an authorised dealer of foreign exchange.

Method of computation of service:- prior to budget:-Earlier under this service, the service tax was payable on commission if shown in the invoice of Money changers. If the services are not shown then the service tax was chargeable on the same. But if the service tax

is not shown in the invoice then the service provider has option to pay the service tax @0.25% of gross amount of currency exchanged. This was cleared with the help of example in CBEC circular no.  334/1/2008-TRU dated 29.2.2008:-


Buying rate $US 1 = Rs.38, selling rate $US 1 = Rs.40

(i) Person exchanged $100 for equivalent rupees

Transaction value = Rs.3800 (Rs.38 x 100)

Service tax payable =Rs.9.5 (0.25% x 3800)

(ii) Person exchanged equivalent rupees for $100

Transaction value = Rs.4000 (40 x 100)

Service tax payable = Rs.10 (0.25% x 4000).

Most of assessee were following this easy formula and paying service tax @ 0.25% of gross amount of currency exchanged.

Method of computation- After Budget:-

But this year budget, the following method has been prescribed for determining the value of service. For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency for that day, multiplied by the total units of currency.

Example I:  US$100 are sold by a customer at the rate of Rupees 45 per US$.

RBI reference rate for US$ is Rupees 45.50 for that day.

The taxable value shall be Rupees 500.

Example II: INR70000 is changed into Great Britain Pound (GBP) and the exchange rate offered is Rupees 70, thereby giving GBP 1000.

RBI reference rate for that day for GBP is Rupees 69.

The taxable value shall be Rupees 1000.

Provided that in case where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money:

Provided further that in case where neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI;”

Now, vide Budget 2010-11, the sub-rule 7B of Rule 6 has been amended. The composition rate in relation to purchase or sale of foreign currency, including money changing, has been lowered from 0.25% to 0.1%..

Thus, now the money changer will have to pay the service tax @ 0.1% of the gross amount of currency exchanged.

The TRU letter has explained the said change as under:

b) The rate of composition under rule 6(7B) has been lowered from 0.25% to 0.1% of the gross amount of money exchanged. However, the proviso relating to paying tax on billed charges has been deleted. Thus now the assessee will have the option to pay tax @ 0.1% of gross amount exchanged or else at standard rated on the value of service in terms of rule 2B, as mentioned above.

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January 2021