Rupee falls – thanks to TRU
If you want to buy a dollar, the exchange rate according to RBI is a little less than Rs. 45/-. But wait! TRU wants to make it more expensive or cheap depending on whether you want to buy or sell Dollars. Now if you want to exchange a dollar, the bank or the exchanger will charge you a 10% Service Tax which will make your dollar costlier by 10.2%. In a letter addressed to the DGST with the mandatory copies to all Chief Commissioners and Commissioners, TRU wants to tax all money changers. But they are not brokers and they don’t charge a commission. They simply buy or sell foreign exchange at the rates fixed by RBI. But TRU has a different logic. The TRU letter says, “Money changers cannot go out of the purview of service tax on the plea that they are merely selling and purchasing foreign currency and not dealing or brokering in foreign exchange” .There is a strange logic behind this logic according to TRU. “Under Sale of Goods Act, Goods means every kind of moveable property but excludes money. Therefore transactions in foreign exchange do no fall under scope of sale.” And if it is not sale is it liable for Service Tax? Strangely the TRU clarification does not mention on what value the tax is to be paid. As the money changers do not charge any commission, what could be the value? Is it the gross payment?
Incidentally TRU seems to be unaware of its own clarification given in CIRCULAR NO. 62/11/2003, Dated: Aug 21, 2003 in which while observing that forex brokers included money changers, clarified that only the service of “foreign exchange broking” when provided by foreign exchange brokers has been brought under the tax net.
In an incisive analysis on the issue, our special column asked Are hotels accepting foreign currency 'foreign exchange brokers'?
We also suggested,
Before interpreting a highly technical term like “ forex broking “ and “ forex broker “ it is expected that TRU would appreciate the ground realities and the practice prevailing in the trade circles. A phone call to RBI office or FEDAI (Foreign Exchange Dealers Association) who regulate forex management in the country, or at least to a bank dealing in foreign exchange, would have made matters more clear (that the authorized dealer or money changers are not permitted to collect any commission as per RBI guide lines), and it is what is least expected from TRU.
Service tax is leviable on foreign exchange (forex) broking service under the category of ‘banking and other financial service’. In terms of the provisions of the Finance Act, 1994, foreign exchange broker includes a money changer (authorized dealer of foreign exchange). In this context, a question has arisen as to whether the service provided by a money changer in relation to exchange of foreign currency is a forex broking service for applicability of service tax levy under ‘banking and other financial services’.
Now the Board clarifies that
1. It was noted that ‘money changing’ and ‘foreign exchange broking’ are two distinct activities.
2. Money changing is an activity of sale and purchase of foreign exchange at the prevalent market rates.
3. On the other hand, foreign exchange broking is the activity performed as an intermediary, on a commission/brokerage basis, for facilitating the clients who wish to buy or sell foreign exchange.
4. The foreign exchange broker providing foreign exchange broking service does not hold title to the foreign exchange.
5. Accordingly, Board is of the view that service tax is not leviable on money changing per se, as such activity does not fall under the category of foreign exchange broking.
6. The instruction issued earlier vide letter F. No. 341/44/2005-TRU, dated 6.10.2005 stands superseded.
Great going CBEC! If this trend continues, consultants will go out of business. While congratulating the Board, we hope and pray that such clarifications will continue to come from the Board and a little faster, so that unproductive litigation can be avoided.
Circular No. dated, the 12thMarch, 2007