Service tax capped at Rs5,000 on forex deals

In what is being seen as a bid to pacify market players, the government has capped service tax on foreign exchange transactions at Rs5,000. The players had raised fears of a significant drop in forex volumes due to high levies on such transactions.

According to a notification, tax on foreign exchange transactions would be calculated "at the rate of 0.1 per cent of the gross amount of currency exchanged for an amount up to Rs1,00,000, subject to the minimum amount of Rs25''.

For transactions between Rs1 lakh and Rs10 lakh, the tax rate would be Rs100, plus 0.05 per cent of the gross amount of currency exchanged, while transactions above Rs10 lakh would be subject to a fixed rate of Rs550 plus 0.01 per cent of the gross amount of the currency exchanged.

However, the maximum amount of service tax paid has been capped at Rs5,000.

The rates are subject to the condition that "the person providing the service shall exercise such option for a financial year and such option shall not be withdrawn during the remaining part of that financial year''.

In his budget speech, finance minister Pranab Mukherjee has proposed introduction of new methods for calculation of service tax on forex transactions.

According to the first method, service tax would be charged at 0.1 per cent of the gross amount of currency exchanged.

Under the second method, service tax would be 1 per cent of the difference between buying/selling rate and the Reserve Bank of India's reference rate for the day multiplied by total units of the currency.

Since May 2008, all foreign exchange transactions have been made subject to service tax.