Banks won't have to pay service tax on forex deals

MUMBAI: Banks will now be exempted from paying service tax on foreign exchange transactions entered into with other lenders. The transactions with customers will be charged a nominal sum of 0.1-0.5% of the transaction amount or a maximum of Rs 5,000 on foreign exchange transactions.

In a notification issued by the finance ministry on March 31, the ministry indicated the amount to be collected by banks as service tax on foreign exchange transactions, the eligibility and the amount to be collected by banks. These issues were taken up by the Foreign Exchange Derivatives' Association of India or FEDAI with the finance ministry about three days ago.

Banks, as service providers, have been given a choice between levying charges based on RBI's reference rate, which is based on the market spot rates, though may differ marginally from the real market rates at a given point of time, or calculating it on an ad-valorem basis, where in the customer would be charged 0.1% on a transaction up to Rs 1 lakh, 0.5% for a transaction between Rs 1 lakh to Rs 10 lakh and a maximum of Rs 5,000 for transactions above Rs 10 lakh.

Earlier, only scheduled banks were exempted from service tax on forex transactions, but the tax was levied on cross currency transactions between scheduled banks and overseas banks. In the amended notification, all banks, local or overseas, have been exempted from the service tax on inter-bank foreign exchange transactions. But bankers say that it is more of an execution issue now.

"The amended notification issued on March 31 addresses the concerns expressed by banks to a great extent. However, since the provisions have been made effective from April 1, 2011, banks don't have the systems to handle the transactions seamlessly. They will have to calculate the service tax applicable for transactions, manually, till the systemic modifications are carried out," said, Unnikrishnan K, deputy chief executive, Indian Banks' Association.

Source: EconomicTimes