By TIOL Research Team

DON'T brush it off as a stupid question not worth wasting time on. Though it may sound odd, all hotels accepting foreign exchange; please get ready to register immediately and pay service tax under Banking and Financial services. Don’t ask any questions, this is as per the clarification given by Board to DGST. Since, the two Apex bodies as far as wisdom on the subject of Service Tax (TRU and DGST ) are involved, the field formations shall not dare to put any questions and the dictum shall be followed forthwith.

The TRU in its letter F.No. 341/44/2005-TRU dt. 06/10/2005 has clarified to DGST, that the service provided by money changers in relation to foreign exchange is covered under Banking and Financial service as defined under Section 65(12) of the Finance Act, 1994 and leviable to service tax under Sec.65(105) (zm) or Section 65(105)(zzk) of the Act.

The TRU has adduced the following reasons for arriving at the above conclusion:

++ Authorised dealers of foreign exchange are defined under Sec.65 (8) of FA, 1994 . According to this section, authorized dealers are all persons under clause 2(c) of Foreign Exchange Management Act, 1999 (FEMA)

++ All money changers are authorized persons in terms of clause 2(c) of FEMA.

++ Therefore all money changers are authorized dealers of foreign exchange under Section 65(8) of the FA for the purpose of service tax levy.

++ Authorised dealers of foreign exchange under section 65(8) are included under the category of foreign exchange brokers defined under Section 65(46) of the FA,1994.

++ Thus all money changers are foreign exchange brokers and are leviable to service tax under Section 65(12a) or 65(12b) depending on their constitution.

++ All money changers under Section 2(c) of FEMA are foreign exchange brokers as inferred above and therefore any service provided by such money changers would amount to foreign exchange broking. Money changers are licensed by the Reserve Bank of India in terms Section 10(1) of FEMA.

++ Service Tax on foreign exchange broking services is applicable to services provided by any foreign exchange broker including banking company, financial institution, non-banking finance company, any body corporate, or commercial concern. Statutory provisions are the same in respect of all these entities, which are engaged in the same activity. Money changers cannot go out of the purview of service tax on the pleas that they are merely selling and purchasing foreign currency and not dealing or broking in foreign exchange. Under sale of Goods Act, goods means every kind of moveable property exclude money. Therefore transactions in foreign exchange do not fall under scope of sale.

Going by the above clarification and reasons adduced as above all money changers (or authorized dealers) – Hotels (who accept foreign exchange), Banks (dealing in foreign exchange), Money changers,- are liable to pay service tax . Whether one agrees or not with the above clarification or not is a matter to be decided by the Appellate fora.

The TRU simply browsed through a couple of definitions given in the Finance Act, 94 and FEMA and equated “foreign exchange dealers” with “foreign exchange brokers” without even verifying what “ foreign exchange broking” means and how “ foreign exchange broking “ takes place in banking circles. Strange is the TRU dictum that “any activity which is not a ‘sale’ under Sale of Goods Act is ‘broking’. The interpretation of TRU - “any service provided by such money changers would amount to foreign exchange broking- would only show how naïve this august body is in the matters of interpreting technical issues such as ‘ forex broking’

Let us try to understand the problem:

First have a look at the statutory definitions under the Finance Act, 1994.

Sec.65(12) “ Banking and Financial Services ‘ means –

a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, namely;-

(iii) securities and foreign exchange ( forex ) broking ;

b) foreign exchange broking provided by a foreign exchange broker other than those covered under sub-clause (a)

Sec. 65(8) : ‘authorized dealer of foreign exchange' has the meaning assigned in ‘ authorized person’ in clause (c ) of Section 2 of Foreign Exchange Management Act,1999.

Sec 65(46) : ‘Foreign exchange broker’ includes any authorized dealer of foreign exchange.

Sec 65 (105) taxable service means any service provided ( or to be provided )-

(zm)to a customer, by a banking company or financial institution including a non-banking financial company, or any other body corporate or commercial concern, in relation to banking and other financial services.

(zzk) to a custoner , by a foreign exchange broker other than those brokers in relation to banking and other financial services referred to in ( sub-clause (zm)

Now have a look at the definitions in FEMA

Sec.2(c) “authorized person” means an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized under sub-section (1) of Sec.10 to deal in foreign exchange or foreign securities;

Sec.(10)(1) : The Reserve Bank may , on an application made to it in this behalf authorize any person to be known as authorized person to deal in foreign exchange or in foreign securities, as authorized dealer, money changer, or off-shore banking unit or in any other manner as it deems fit.

Going by the above definitions, it is obvious that ‘ money changers’ are authorized dealers and as such falling under the definition of Sec 2 (c) of FEMA, but the similarity ends there only.

What TRU failed to understand is that the Finance Act, 94 sought to levy service tax on the activity of “ foreign exchange broking’ done by persons covered under Sec. 65(12) (a and b) and not on any activity or on the activity of ‘ purchasing and selling’ ( of money changer or for that matter foreign exchange dealer ) as concluded by TRU in the said letter.

The term “broker” refers to as middleman between two entities who collects commission or brokerage for the services rendered as middleman (just recollect, what a stock broker does in case of securities). Further, the broker is not exposed to the risk of foreign exchange rate fluctuations for it is the buyer or seller, who deals through him who is exposed to the risk. Whereas in the instant case the money changers or authorized dealer (for eg. Banks) are exposed to exchange rate risks as they buy and sell forex at the rate prevailing on the day of transaction. By interpreting “money changers ‘ as forex broker, the TRU has failed to appreciate this subtle difference between the two. By this clarification the TRU has given a new meaning to the entire business of forex broking. May be the RBI needs to take a leaf out of TRU’s book.

Further, the term ‘forex broking’ has not been defined either in Finance Act, 94 or in FEMA, and by no stretch of imagination the activity of buying and selling by money changer or authorized dealer can be considered as forex broking.

Even if the activity of buying and selling is interpreted to mean “ forex broking”, what is the value that is to be taken for the purpose of levy of service tax?. Under RBI guidelines the money changers or the authorized dealers (banks) should not charge any commission or charge any amount over and above the exchange rate prevailing at the time of transaction from their customers. Perhaps, TRU appears to be not aware of this fact.

As per the permission granted under Sec.10(1) of FEMA, the “ Money Changers” are of two categories- Full Fledged Money Changers ( FFMCs ) and Restricted Money Changers ( RMC ). A FFMC is authorized to undertake both purchase and sale transactions with the public. A RMC is authorized only to purchase foreign currency. All hotels, who are licensed- obviously under Sec.10 (1) of FEMA- to accept foreign exchange from tourists fall under the category of RMC. Going by the above clarification, even the hotels (RMCs) also construed to be engaged in the forex broking and are liable to pay service tax.

In fact establishments like FFMC and RMC are created to facilitate easy conversion of currency from tourists etc., and certainly not to undertake broking activity.

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.

So all money changers (including the hotels), please get ready to pay service tax. If you entertain any silly doubt as to on what value, service tax is to be discharged, refer to Section 67, which says gross amount collected (may be entire value of transaction) or wait for yet another clarification from TRU.

The entire problem lies in the definition given at Sec 65(46) of FA,94 - ‘ Foreign exchange broker’ includes any authorized dealer of foreign exchange.

If this clarification is read with the definition of “ foreign exchange “ given at Sec.2(n) of FEMA, all the banks are liable to pay service tax on all the dealings or transactions involving issue of drafts, travellers cheques, letters of credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency or vice-versa . Obviously the Banks are liable to pay service tax on all such activities from 16/07/2001 (the date from which Service Tax on BFS has come into being) as all these activities constitute “foreign exchange broking ‘.

(as per Sec. 2(n) ‘ foreign exchange’ means foreign currency and includes,-

(i) deposits, credits and balances payable in any foreign currency,

(ii) drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,

(iii) Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn by banks, institutions or persons outside India, but payable in Indian currency. )

Bad times ahead for the banking industry – thanks to TRU. And again why this secrecy?

See the TRU letter here