ASSOCHAM urges govt to exempt currency conversions from service tax

The volatility in exchange rate markets even on intra-day is quite large, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM). Apex industry body ASSOCHAM has urged the government to exempt currency conversions from service tax as the new rule will put extra burden on corporates and blunt competitiveness of exports out of India.  The Reserve Bank of India (RBI) publishes market rates at noon to act as a reference rate and the foreign exchange market is open between 0900 to 1630 hrs. Even if a bank decides to charge no incremental charge or fee over and above its cover rate in inter-bank market, the final transaction rate charged to a corporate can be significantly different from the RBIB (RBI reference rate).  The volatility in exchange rate markets even on intra-day is quite large, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM). On many days in the past one year when exchange rate moved by one per cent, the median intra-day movement was half per cent.  “Therefore a banking and financial services entity cannot charge such difference to its customers on real time basis when transaction is booked,” said chamber’s secretary general D.S. Rawat. “This valuation basis will significantly increase transaction costs and decrease India’s competitiveness in global markets.”  Charging service tax on the differential between RBIB and the rate at which transaction is booked has no link with service provided by a bank. There is no element of service involved in such transactions, said Mr Rawat in a representation to the Central Board of Excise and Customs. “Moreover, companies have no control over such transactions.”  There are no such instances of a similar tax being imposed anywhere in the world – especially in countries where Indian companies compete in common markets. This has also been stated in a research study released by the Department of Economic Affairs.  “As a matter of fact, competing countries have been facilitating their external sector by various measures like a stable currency in China, procedural relaxations and lower interest rates,” said Mr Rawat. “It would tantamount to imposing service tax not on the service part – which otherwise is absent in such transactions – but on the profit or loss made by money changers.”  This is against the very spirit of service tax legislation where rendering services is a determining factor, he added.  If at all the government wants to bring these transactions within the ambit of service tax, then determination of value of services should be restricted to fees or spreads charged by banks towards foreign exchange conversions, and not otherwise.  In any case, said Mr Rawat, the taxable value tax should not be more than 0.01% of transaction value.