The Hindu Business Line : Govt may consider differential rates for forex deals

Mumbai, June 9 Banks may get a reprieve on the service tax levied on inter-bank foreign exchange transactions, thanks to efforts by the Indian Banks’ Association. Following representations by the IBA, the Central Government has agreed in principle to consider a differential rate on service tax for inter-bank forex transactions.

Banks started charging service charge of Rs 100 on all foreign exchange transactions last month, on which they were levying rate of 0.25 per cent, following a notification from the Central Government, because levying the tax on the gross amount of the currency exchanged would have been too expensive.

The IBA had asked the Government for a waiver on the transactions with the RBI and inter-bank transactions as they would have proved very expensive for banks. There is also no net gain on inter-bank transactions as both parties involved, in this case two banks, have to pay the tax.

The Government had asked the IBA to explain how the service charge of Rs 100 is reflective of all the services they provide.

As a response to this, the IBA is collecting details from banks such as volumes of foreign exchange transactions to explain the fee of Rs 100, said an official from IBA.

Another issue that was raised was whether there would be a fee if the transaction involved two non-rupee currencies, such as yen and dollar, said the official. This is a problem that many foreign banks could face, when they execute a transaction from one of their overseas offices.

While the tax on corporate transactions does not seem to have a big impact, the tax on inter-bank transactions may lead to drop in volumes, said dealers.

According to the RBI’s Annual Monetary Policy, the inter-bank turnover in the foreign exchange market was $40.88 billion at end-March 2008, higher than $24.52 billion in the previous year.

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