The Hindu Business Line : Taxing times for money changers

As per Finance Act 2008 amendments, effective May 16, 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 authorised 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 another, or between banks and the Reserve Bank of India.

Prior to May 16, Finance Act, 2008 activities or transactions of purchase or sale of foreign exchange currency and money changing was not covered under scope of service tax based on logic given in Board circular. CBEC Circular No 96/6/2007 – ST dated August 23, 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 authorised money changers or dealers into service tax net.

The Notification for levy of service tax this time has been issued on January 10, 2008 (Saturday) and have been made effective from May 16 2008, i.e. just after a gap of four working days.

Never before, such notifications have been issued with such a short time being allowed to service providers to do the home work. In India, with service providers (particularly, banks) having nation-wide network of branches, reasonable time should have been allowed. For example, for a bank like State Bank of India which has over 10,000 branches, even communication can not reach all centres, what to talk of having a clarity on taxability .

Service tax on forex broking is already a taxable service effective from July 1, 2003 and Finance Act, 2008 has amended the definition of banking and financial services to include money changing transactions also. 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.

Currency not defined

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 traveller’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 .

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 May 31, 2006.

Taxable services provided or to be provided by any person to the RBI or by the apex 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.

Need for clarity

In case of centralised registration of such branches, there is no question of levy of service tax but in 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.

Foreign exchange brokers indicate 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 per cent of the gross amount of currency exchanged.

Two different activities

At one point of time (vide Circular No 92/3/2006 dated March 12, 2007), the Government itself 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. While one may accept its inclusion in service tax net, the levying of a flat rate of 0.25 per centon 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 per cent.

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.

All said and done, the levy of service tax on money changing may also have to be judicially tested as whether it constitutes a service at all or not is also an issue among banking circles.

(The author is a Jaipur-based chartered accountant.)

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