The government has capped service tax on foreign exchange transactions at Rs 5,000, which is seen as a bid to pacify market players, who feared a significant drop in the country’s forex volumes due to high levies on such transactions.  As per a notification, tax for foreign exchange transactions will be calculated “at the rate of 0.1 per cent of the gross amount of currency exchanged for an amount up to Rs 1,00,000, subject to the minimum amount of Rs 25”.

For transactions between Rs 1 and Rs 10 lakh, the tax rate will Rs 100, plus 0.05 per cent of the gross amount of currency exchanged.

For transactions over Rs 10 lakh, the rate of service tax to be levied has been fixed at Rs 550 plus 0.01 per cent of the gross amount of currency exchanged. However, the maximum amount of service tax paid has been capped at Rs 5,000.

The rates are subject to the condition that “the person providing the service shall exercise such option for a financial year and such option shall not be withdrawn during the remaining part of that financial year.”

In his Budget speech, Finance Minister Pranab Mukherjee had proposed to introduce new methods to calculate service tax on forex transactions.

According to the first technique, service tax will be imposed at 0.1 per cent of the gross amount of currency exchanged.

As per the second technique, service tax will be one per cent of the difference between buying/selling rate and the Reserve Bank of India’s reference rate for the day multiplied by total units of the currency.

All foreign exchange transactions have been subjected to service tax since May, 2008.

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