GST on Foreign Exchange Transactions: Rates and Applicability

Foreign exchange transactions involve exchanging one currency for another currency, which can be used for international trade and travel. This article focuses on how GST affects foreign exchange transactions, how supply value is calculated, and the GST rate that applies to these transactions.

What is GST on Foreign Exchange?

Conversion of foreign exchange for a consideration is a taxable service under the scope of GST. Hence, GST shall be applied on the value of services provided by banks or authorised dealers for facilitating these exchanges. Notably, GST shall not be applied to currency value, as it is deemed transaction in money.

GST Applicability on Foreign Exchange Transactions can be understood with the help of scope of supply. Buying & selling foreign currencies, sending remittances overseas (for instance, gifts or education fees), or loading your forex travel card via any bank or authorised dealer—on all such services, GST shall be applicable.

GST Rates on Foreign Exchange

18% GST is charged on the value of such services. The taxable value under these transactions is calculated using two methods as prescribed under Rule 32 of the CGST Rules 2017, i.e., the calculation-based method and the slab-based method.

Banks and authorised dealers must opt for one of these methods and apply them consistently over the financial year.

Calculation of Foreign Exchange Transactions

(i) Calculation-based method

The value under this method is determined by the difference between the transaction rate and the RBI reference rate. For example, $10,000 are sold by a customer to a bank at Rs.85/$, while the RBI reference rate on that day is Rs.84.5/$; according value of the taxable service is Rs. 5,000 [(85 - 84.5) x 10,000] on which GST shall be applied at 18%.

If the RBI reference rate is not available as the RBI publishes rates for selected major currencies. In such cases, the supply value is determined as 1% of the gross amount received or paid in Indian Rupees. 

In rare circumstances, if neither of the currencies exchanged is an Indian Rupee, then the value of the supply shall be 1% of the lower of both foreign currencies converted to Indian Rupees. For example, a business wants to convert its receipts from US$ to GBP for paying its creditors. The value of taxable supply shall be calculated as follows: 

(ii) Slab-based method

Alternative to above method, the CGST Rule 32 also provides a mechanism to calculate value of taxable supply based on slabs-

If INR 1,500,000 worth of currencies are exchanged, the value of the supply shall be Rs.6,000 (5,500 + 0.1 of 500,000 (1,500,000 - 1,000,000). Accordingly, GST of Rs.1,080 shall be payable.