Tax Implication on Forex Transactions

Being the largest liquid market in the world, Forex opens opportunities for lot of people who wish to invest in it and earn by making rational decisions thus opening avenues for every person in making money who takes keen interest in Forex.

What is Forex?

• Forex is a global marketplace for trading international currencies and derivatives.
• Foreign Exchange, implies converting one currency to another mainly for trading like business related or tourism purposes or any other personal purpose.
• Basically a large amount of currency is exchanged with the other currency having equal value at current market price.
• Foreign exchange being a global market for exchanging national currencies determines the value of currencies also known as exchange rate.
• There are no central bodies or clearing houses to keep an eye on the forex market.

Foreign Exchange Trading

Foreign Exchange Trading means means buying/selling currency of a particular country. Currencies trade in the forex market which is considered to be highly volatile as the price quotes change frequently. There are many ways to trade in forex like hedging, speculation, forward and futures contracts. Trading takes place in lots having a micro lot of 1000 units, mini lot of 10000 units and a standard lot of 100000 units

In this forex market, traders get the flexibility to trade 24×7 anytime anywhere. There is no eligibilty to be able to trade in such market and the trade is highly liquid. People speculate on the fluctuations which take place amongst the various currencies. There are many factors which affect the income earned from forex transactions like what techniques the trader is adopting, financial exposure, external factors etc

Capital and Current Account Transactions under Forex

Basically there are two types of transactions capital and current account under the Liberalised Remittance Scheme* which a resident individual does for remitting abroad (*Under this scheme, a resident individual can transfer funds upto $250000 freely outside India without any permission from RBI).

• Examples of Capital account Transactions buying of property abroad, opening foreign currency account abroad with a bank, lending loans to NRI, making investments in shares by purchasing listed and unlisted stocks, setting up joint venture or wholly owned subsidiary etc
• Examples of Current Account Transactions: going overseas for education, medical purposes, or for employment, grants given in the form of loan in rupee to NRI/PIO close relatives under the LRS scheme and other current account transactions allowable under the FEMA Act.

Is Tax applicable on Forex?

• Forex attracts tax under both Income Tax and GST. Neither the Income Tax nor GST imposes stringent rules and regulations on the Foreign Exchange Transactions.
• There are certain limits being defined under both the Acts which should be followed to make the tax calculations simple and easier.
• With the implementation of GST, the tax provisions applicable on forex have changed.
• The rates are not too high that is it shall be 18% on the portion which comes under the head- Taxable Value which is explained in detail below.

Tax Implications on Forex Transactions:

Income Tax Provisions:

• As per Section 206C(1G) of the Income Tax Act 1961, prescribes certain limit, exceeding which, tax is levied at a specified rate. As per Finance Bill 2020, an amount upto Rs 7 lacs per financial year is exempted from tax liability. Above the limit of Rs 7 lacs, TCS i.e Tax Collected at Source is applicable.
• In case of tour packages for abroad, TCS shall apply on the entire amount of package cost irrespective of the above mentioned limit of   Rs 7 lacs.
• The tax rate applicable on payments above Rs 7 lacs is 5% and 0.5% for educational loan transactions.
• Also it is mandatory for the individual to provide his Permanent Account Number (PAN), otherwise TCS at the rate of 10% shall be charged.
• For claiming refund of TCS or to set off with the total tax liability, an individual needs to file his Income Tax Return within the specified due date.
• Foreign Exchange gains/losses if of revenue nature shall be allowed as deduction in the year in which such gain/loss arises. Unrealised exchange fluctuations are also allowed as deduction in the year in which they are accounted for.

For Example: An Individual makes a foreign exchange transaction of RS 400000, TCS shall not be attracted as the amount is less than Rs 7 lacs.

In case of amount exceeding Rs 7 lacs for like say Rs 1200000, TCS shall be charged at the rate of 5% of (Rs 1200000-Rs 700000) = Rs 25000

GST Provisions:

GST will be levied on that portion of transaction which is under “taxable value” bracket. The tax shall be determined on the basis of value of supply of services The value of supply of services shall be calculated (for purchase or sale of foreign currency) as follows:

Method 1:

• Type 1: Where one of the value is exchanged in Indian Rupee: If the currency is exchanged from or to Indian Rupees, the value shall be equal to difference in the buying rate and selling rate of the Currency and the Reference Rate at the time of exchange multiplied by the no of units of the currency.

For example: On 22 June 2021 Mr X converted USD 100 into INR 6800.RBI’s Reference Rate at the time of exchange was Rs 62

Value of Supply:(68-62) *100=INR 600

GST will be levied on INR 600

• Type 2: Where none of the currencies exchanged in Indian Rupee: Value of Supply shall be calculated as 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee at the reference rate given by RBI.

For Eg:

US Dollar converted to Indian Rupee:6000$*Rs 64=384000

Uk Pound converted to Indian Rupee:5500$*Rs 83=456500

Value of taxable services=1% of 384000=Rs 3840

Method 2: A person can exercise an option to calculate the value for a financial year provided such method cannot be modified or revoked in the remaining part of the financial year. The value of supply shall be as follows:

For Eg: Mr. A, has exchanged US $ 12,000 to INR @ ₹66 per US $ The value of supply based on the second method will be determined as follows: Value of currency exchanged= ₹66* $12000 = ₹792,000 Upto ₹1,00,000 =₹ 1,000, For ₹ 692,000=Rs 3460 (0.50%*₹692,000)
Value of supply =₹ 4460

Conclusion

Neither The Income Tax nor the GST Rules are harsh on forex. The Income Tax Provisions only focusses on the specified limit and the applicable rate on it. Infact the GST Provisions have clarified the forex transactions in terms of different methods which simplifies them, making it clear for the people to determine the value of supply under GST.