SERVICE TAX ON MONEY CHANGING ACTIVITIES

[Dr.Sanjiv Agarwal]

Amendment by Finance Act, 2008

As per Finance Act 2008 amendments, w.e.f. 16.5.2008 banking and other financial services will now include purchase or sale of foreign currency, including money changing services provided by banking companies etc., and also by foreign exchange brokers or any authorised dealer in foreign exchange or an authorized money changer other than bank.                                                                        

Accordingly, all money changing transactions undertaken by banks, forex brokers and money changes shall be subject to levy of service tax .The transactions could be between banks (service providers) and their customers, banks and their branches, one bank and other bank or between banks and Reserve Bank of India.

Erstwhile  provisions

Prior to 16.5.2008 Finance Act, 2008 activities or transactions of purchase or sale of foreign exchange currency and money changing  were not covered under scope of service tax based on logic given in Board circular. CBEC Circular No 96/7/2007 -ST dated 23.8.2007 also clarified that service tax is not leviable  on money changing activities as it would not fall under foreign exchange broking. Finance Act,2008 has amended the definition of banking and other financial service u/s 65(12) to include purchase and sale of foreign exchange including money changing service provided by authorized money changers or dealers into service tax net.

Forex broking vis a vis money changing

Service tax on forex broking is already a taxable service w.e.f. 1.7.2003 and Finance Act, 2008 has amended the definition of banking and financial services to include money changing transactions also. Now, service tax will be levied on purchase or sale of foreign currency, including money changing, provided by an authorized dealer in foreign currency or an authorised money changer, in addition to a foreign exchange broker. An explanation has been added to the effect that explicit mention of the consideration for the services provided in relation to purchase or sale of foreign currency is not relevant for the purpose of levy of service tax. Taxable services [sections 65(105)(zzk) and 65(105)(zm)] has also been amended suitably. With these amendments, services provided in relation to purchase or sale of foreign currency by a foreign exchange broker, money changer and authorised dealer of foreign exchange shall also be leviable to service tax

In a typical money changing, the currencies of different countries are exchanged at the prevailing rates which change almost every hour. However, in case of a pure purchase and sale transaction, the net difference would imply  trading margin and not a consideration for rendering a service, but it will be now subject to levy of service tax.

Foreign exchange brokers provide services as an intermediary in relation to purchase or sale of foreign currency on a commission/brokerage basis. Purchase or sale of foreign currency is undertaken by foreign exchange broker and also by persons authorized under Foreign Exchange Management Act, 1999 to deal in foreign exchange and having licence issued by RBI. Such authorised persons are known as money changers or authorised dealers of foreign exchange. Services in relation to purchase or sale of foreign currency is, therefore, provided by foreign exchange broker, money changer and also authorised dealer of foreign exchange.

Scope of money changing business

At one point of time (vide Circular No 92/3/2007 dated 12.3.2007),Government it self had clarified that money changing and forex broking are two different  activities and money changing is an activity of sale and purchase of foreign exchange at prevailing market rates. Now, Finance Act, 2008 has taxed money changing also as a taxable service

The activities undertaken by money changers  will also involve levy of service tax on both limbs of transaction - buying and selling. If a money changer buys one dollar @  Rs.39 and sells same @Rs 40, he shall have to  pay service tax on both transactions on gross value rather than or net margin of Rs 1. Also, it is not just hard  currencies but since currency has not been defined in service tax provisions, if one takes definition of foreign currency from FEMA, it would also include traveler's cheques and other instruments of foreign currency. Again, there is no charity on this. Similarly international credit cards may also  be subjected to service tax for foreign currency transactions .

Types of transactions

While transactions between banks and customers would be taxable, inter bank transactions too are commercial in nature and would therefore, be taxable. On transactions with Reserve Bank of India, there exists an exemption vide Notification No 22/2006-ST dated 31.5.2006. Taxable services provided or to be provided by any person to Reserve  Bank of India or by Reserve Bank to any person  are exempt. This would cover forex services also. For transactions amongst bank branches (intra bank), service tax will generally not be applicable on the ground that service can not be provided to self and there ought to be two parties- service provider and service receiver. In case of centralized registration of such branches, there is no question of levy of service tax but is case of branches having different service tax registrations, problem may arise but as a  principle, there should not be  levy of service tax on intra bank  transactions. Since section 67 on valuation now is specific on inclusion of book adjustments (debits and credits) in value of service, there is a need for clarity on this aspect as well.

Valuation of money changing business

Foreign exchange broker indicates the consideration for the services provided (commission) explicitly. Whereas money changers/authorised dealers of foreign exchange providing same services may not necessarily indicate the consideration explicitly.

To enable determination of taxable value, where the consideration for the services provided in relation to purchase or sale of foreign currency is not explicitly indicated by the service provider, a method under rule 6(7B) of the Service Tax Rules, 1994 has been prescribed. As per this provision, the service provider has the option to pay service tax calculated at the rate of 0.25% of the gross amount of currency exchanged.

CBEC has also illustrated the taxability by way of the following  illustration -

Illustration:

Buying rate : US$ 1 = Rs.38    //                              Selling rate : US$ 1 = Rs.40

(i) Purchase of US$ 100 by the service provider:

Gross amount of currency exchanged in rupees          = Rs.3800 (Rs.38 x 100)

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

(ii) Sale of US$ 100 by the service provider:

Gross amount of currency exchanged in rupees        = Rs.4000 (Rs.40 x 100)

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

While one may accept its inclusion in service tax net, the levying of a flat rate of 0.25% on gross amount exchanged is devoid of any basis or logic. One fails to understand how this percentage has been arrived at. The rule states that if no consideration is mentioned, service tax will be leviable @ 0.25 % .

An example will make this difference clear-

                                                                                         Case A                         Case B

 

100 US dollars exchanged for Indian  Rupees                    Rs. 4000                      RS. 4000

Fee charged and mentioned on advice/ invoice                    40                                not mentioned (say @ 1%)

Service tax @ 12.36 % including cess                              Rs. 4.94                             -

Service tax @ 0.25 % on Rs 4000 including cess                  --                                Rs 10.30

Thus, the service tax liability is double the service payable in a normal course on the service component .

It can be said that since implications are severe as the business operates on a wafer thin margin basis, it would be advisable for banks and other service providers to charge a consideration explicitly on such transactions to avoid litigation and huge taxation. This could be a percentage of the amount of currency involved or fixed amount per transaction.