How to Pay GST on Exchanging Currency

Ever thought about what your currency changer gets from converting your foreign currency? And what tax liability falls after the onset of the GST regime? Read on.

Your currency conversion would remain incomplete even if you know the exchange rate until you have factored in the applicable service tax. So, how do you compute the service tax, or the GST rate today, on exchanging currency?

The Reserve Bank of India permits Authorized Money Changers under Section 10 of the Foreign Exchange Management Act, 1999. This dealer agrees to exchange your currency at rates that are mutually agreeable. This is because the exchange rate keeps on changing every second of the day as currency is traded on an international exchange.

On the other hand, the RBI also, releases a daily reference rate for the Rupee vis-à-vis other currencies. The dealer hopes to earn her income by encashing the difference between buying and selling rates and may herself indulge in trading of securities involving foreign currency. For providing you with the service of currency conversion at a place of convenience, the dealer charges a commission on the exchange value. NRIs, tourists and businesses may find this service indispensable to their activities.

You may find it surprising but the tax on the dealer’s income is not calculated on the value of the commission she charges. Instead, the GST rate depends upon the value of currency being exchanged. This is a standard feature of GST valuation: ad-valorem tax rate or value based computation of tax liability.

There are two methods which a supplier of exchange currency may use to calculate service tax:

1.       The first method can be sub-divided into whether the RBI reference rate is available or not available:

a.       If RBI Reference rate is NOT available:
A tax rate of 1% of the total amount of Indian currency transacted, whether received or released.

b.      If RBI Reference rate IS available:
The difference in rate of exchange levied and the RBI reference rate multiplied by the total number of units converted.

2.       The second of the two methods makes it compulsory on the dealer to use the same method for self-assessment of tax throughout the year:

Currency converted (INR)	Taxable amount (%age of currency)
Upto 1 lakh	1% or min Rs 250
1 lakh to 10 lakh	0.5% + Rs 1000
More than 10 lakh	0.1% + Rs 5500

Take advantage of the online revolution to get CA assistance from a CA to efile income tax returns via an online tax platform such as AllindiaITR, a product of Corwhite Solutions Private Limited.