Amendment to Sec. 67A - Service tax on foreign currency payments
AUGUST 29, 2014
By Kanagaraj R, B Com., ACA., CS., CWA
THE recent amendment to Section 67A (Explanation regarding rate of exchange to be adopted for foreign currency transactions) by the Finance (No.2) Act, 2014 read with notifications 18 & 19/2014-ST, both dated 25.08.2014 & effective from 01.10.2014, seeks to modify the basis of discharging service tax in respect of the foreign currency payments.
This amendment is a responsive action to the various representations from the Industry, wherein the practical difficulties due to the inconsistency in adopting the foreign exchange rates between accounting and service tax compliance.
Prior to this amendment, the rate of exchange notified under section 14 of Customs Act, 1962 from time to time has to be adopted for the purpose of service tax. With effect from 1st October 2014, the applicable rate of exchange is as per the generally accepted accounting principles (GAAP). For this purpose Rule 11 has been inserted in the Service Tax Rules, 1994 [Refer notification number: 19/2014-service tax].
The Rule is reproduced below for ready reference:
"11. Determination of rate of exchange – The rate of exchange for determination of value of taxable service shall be the applicable rate of exchange as per the generally accepted accounting principleson the date when point of taxation arises in terms of the Point of Taxation Rules, 2011."
Generally Accepted Accounting Principles:
As per Ind(AS) 21 – Effects of changes in Foreign Exchange Rates, the initial recognition in the books of accounts shall be as under:
"A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction".
The spot exchange rate prevalent on the day of the transaction has to be followed as per the above-said standards. The said spot exchange rate is being followed by various entities independently based on the source of information from Reserve Bank of India (RBI), Foreign Exchange Dealers' Association of India (FEDAI), State bank of India (SBI), etc., in line with the accounting policies adopted. Therefore, in other words the rate of exchange adopted for the purpose of accounting could be followed for the purpose of discharging service tax .
Point of Taxation:
In respect of the ‘Import of services', service tax is liable to be paid under reverse charge and the point of taxation is governed under Rule 7 of the Point of Taxation Rules, 2011. The below table summarizes the statutory provision:
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Scenario
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Point of taxation
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Rate of exchange applicable on
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If the payment is made within 3 months from the date of Vendor's Invoice
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Date of Payment
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Date of Payment
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If the payment is made after 3 months from the date of Vendor's Invoice
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Date of Invoice
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Date of Invoice
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Transitional Provisions:
Since the amendment is effective from 1st October' 2014, the transitional provisions are tabulated below:
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Effective period
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If the payment is made within 3 months from the date of Invoice
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If the payment is made after 3 months from the date of Invoice
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Upto 30th Sep'2014
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Rate of exchange notified by customs on the date of payment
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Rate of exchange notified by customs on the date of invoice
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On or after 1st Oct '2014
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Rate of exchange adopted in Accounting as on the date of payment
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Rate of exchange adopted in Accounting as on the date of invoice
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Even if the invoice date is prior to 1st Oct' 2014
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It is hoped that the above Rule is welcomed by the taxpayers and teething troubles, if any, in its implementation, should be sorted out by the proactive CBEC.
(The author is Assistant Manager - Indirect taxes, Larsen & Toubro Limited)
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