Indian Banks Unhappy With Tax on Foreign Exchange Transactions
The Revenue Department of the Government of India, has decided to levy a 0.25 per cent service tax on foreign exchange transactions undertaken by banks for their clients, a move which would have seriously negative implications on the profitability of the business.
Crucially, the tax will be levied on the rupee equivalent amount for every foreign exchange transaction, which is the primary reason banks are unhappy with the measure. “The presumptive rate of 0.25 per cent on the turnover is unrealistic considering the market realities. Banks do not make this much profit from foreign exchange transactions,” said an Indian Banks’ Association (IBA) spokesperson.
Currently the service tax rate is 12.36 per cent, or 0.25 per cent of turnover, if service tax is not levied. On May 16th service tax was imposed on foreign exchange transactions and the banks started collecting a standardised fee of Rs 100 per transaction regardless of its notional value ($100 or $ 100 million), as well as service tax at the applicable rate.
Prior to this, banks were not charging a separate fee and they say they have levied a flat charge to minnimise the negative impact on their business. The Revenue Department objects to this practice on the grounds that banks are not capturing the entire margin in foreign exchange transactions.
The banks argue that the 0.25 per cent charge on every transaction will have a material impact on the foreign exchange market, and will simply result in losses on their part since they will be unable to pass on the burden of tax to their clients like exporters who continually convert export earnings into Rupees.
The IBA has already lobbied the previous Finance Minister, Mr Chidamabaram, who has instructed the Department of Financial Services to discuss the matter with the Revenue Department.
The Market Makers
Banks make a profit in foreign exchange transactions by making markets and quoting a spread. If the Rupee trades at 50 to the Dollar, then the bank will bid or buy dollars at below that rate and offer or sell dollars above that rate. The bank attempts to maintain a margin to cover their own foreign exchange risk which occurs as a result of daily price movements.
Bankers argue that there is no service component in such transactions and they make the dubious claim that with hundreds of transactions daily it would be difficult to keep track of the gains and losses of each transaction.
There are two types of foreign exchange transactions a bank can undertake, which fall under the tax - bank to bank and bank to customer. Inter-bank margins are razor thin, and service tax is not levied on foreign exchange transactions with the Reserve Bank of India.
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hi
i am working in sharjah i wanna know how much money is taxed for money transfer in a comman sb account
regards
vikram