Service Tax on Foreign Exchange

Calculation of Service Tax on Foreign Exchange Conversion

The Government has prescribed 2 methods for the computation of Service Tax on Foreign Exchange, and the service provider is free to choose any methods for the computation of Service Tax on Forex Conversion. However, if the service provider opts for any method, he will have to use the same method for the computation of Service Tax on Foreign Exchange Conversion throughout the year and cannot change the method.

Method 1: Abatement Scheme for Computation of Service Tax on Foreign Exchange.

The Ministry of Finance vides Notification No. 03/2012-Service Tax dated 17^th March 2012 brought some Amendments in the Service Tax Rules. Amongst other amendments, this Notification has also brought an Amendment in Rule 6(7B) which is for the computation of Service Tax on Forex Conversion. As per this Amendment, Service Tax on Foreign Exchange Shall be payable as follows:-

Value of Foreign Currency(In INR)(Per transaction)	Service Tax application(Wef 1st April 2012)(Per transaction)
Upto Rs.100000/-	0.12% of the amount of currency ,subject to minimum of Rs.30/-
From Rs.100000/- to Rs.1000000/-	Rs.120 + 0.06% of the amount of currency exceeding Rs.100000/-
Above Rs.1000000/-	Rs.660+0.012% of the amount of currency exceeding Rs.1000000/- , subject to a maximum of Rs.6000/-

Education Cess @ 2% & SHEC @ 1% Extra

Thus, the maximum amount of Service Tax payable on exchanging foreign currency has been capped at Rs.6000/-

This method is an easy and convenient way of computation of Service Tax on Foreign Exchange and most of the Banks and Foreign Dealers are applying this method. The 2^nd method has also been explained hereunder for your reference.

 Method 2: for calculation of Service Tax on Foreign Exchange Conversion.

If a currency is exchanged from or to Indian Rupees then, as per Notification No.02/2011 dated 1^st March 2011, the value of taxable service shall be equal to the difference in the buying rate or selling rate, as the case may be, and the RBI reference Rate for that currency.

For example: If US $ 100 are sold by a customer @ Rs.55 per US $ and the RBI reference rate for US $ is Rs.55.73, then the taxable value shall be Rs.730 (1000 X 0.73) and the Service Tax @ 12.36% shall be on Rs.730.

In case, The RBI reference rate for a currency is not available, then the value shall be 1% of the gross amount of Indian Rupees provided or received by the person changing the currency.