Money Changers to pay more Service Tax: Govt. Goofed up calculation in example 1 of notification

By TIOL Budget Team

NEW DELHI, MAR 01, 2011: HITHERTO Foreign exchange brokers/ authorised dealers (banks) ware paying service tax on the services of money changing/ foreign exchange broking services by showing some nominal value as consideration towards taxable services in terms of the proviso Rule 7B of Service Tax Rules.

Sub-rule (7B) of Service Tax Rules has been amended vide notification No. 3/2011-ST to delete the proviso in the rule, which provides for payment of service tax on consideration shown separately in the bill.

With this amendment the option available for money changers is either to pay service tax on 0.1% (earlier 0.25% of gross amount of currency exchanged)

or

on the value of taxable services determined in terms of new rule -Rule 2B – inserted in valuation Service Tax (Determination of Value) Rules.

“2B. Determination of value of service in relation to money changing.- Subject to the provisions ofsection 67, the value of taxable service provided for the services referred to in sub-clause (zm) and(zzk) of clause (105) of section 65 of the Act, so far as it pertains to purchase or sale of foreigncurrency, including money changing, shall be determined by the service provider in the followingmanner:-

For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal tothe difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India(RBI) reference rate for that currency for that day, multiplied by the total units of currency.

Example I : USD100 are sold by a customer at the rate of Rupees 45 per USD.

RBI reference rate for USD is Rupees 45.50 for that day.

The taxable value shall be Rupees 500.

Example II: INR70000 is changed into Great Britain Pound (GBP) and the exchange rate offered is Rupees 70, thereby giving GBP 1000.

RBI reference rate for that day for GBP is Rupees 69.

The taxable value shall be Rupees 1000.

Provided that in case where the RBI reference rate for a currency is not available, the valueshall be 1% of the gross amount of Indian Rupees provided or received, by the person changing themoney:

Provided further that in case where neither of the currencies exchanged is Indian Rupee, thevalue shall be equal to 1% of the lesser of the two amounts the person changing the money wouldhave received by converting any of the two currencies into Indian Rupee on that day at the referencerate provided by RBI;”

(the correct taxable value in example 1 would be 100 x 0.50 = Rs.50/- not Rs.500/- as mentioned above in the notification)