GST on Foreign Exchange in India: The introduction of the Goods and Services Tax (GST) in India transformed the taxation system, impacting various financial sectors, including foreign exchange transactions. Whether you’re converting currency, sending remittances abroad, or trading in forex, understanding GST on foreign exchange in India is essential to ensure compliance and cost-effectiveness.
In this blog, let us uncover all about answering the most commonly asked questions for GST on foreign exchange in India. So, If you are an international student traveling abroad for higher studies, it is essential to understand the GST implications on currency exchange in India.
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What is GST on Foreign Exchange in India?
GST on Foreign Exchange in India refers to the taxation of currency conversion services offered by banks, financial institutions, and authorized money changers. Like in many countries, India imposes GST on foreign exchange transactions, including currency exchanges for travel, trade, and investment purposes. The applicable tax rates and valuation methods are predefined by the government to ensure transparency and compliance in forex dealings.
The rate of GST on Foreign Exchange in India depends on the transaction type and the amount involved in the currency conversion. Understanding the tax structure, calculation methods, and possible exemptions is crucial for individuals and businesses engaging in cross-border transactions. This guide provides an in-depth look at how GST on foreign exchange works in India and its implications on financial transactions.
How GST on Foreign Exchange in India is calculated?
The valuation of services related to currency exchange under GST is governed by Rule 32 of the Central Goods and Services Tax (CGST) Rules, 2017. There are two primary methods to calculate the taxable value of forex transactions via an international bank account.
Understanding the correct method for tax calculation is essential to determine the impact of GST on foreign exchange in India and avoid overpaying or underpaying taxes, which can lead to compliance issues or penalties.
Method 1: Based on the Difference Between Exchange Rates
This method applies when one of the currencies exchanged is Indian Rupees (INR). The GST on forex transactions is calculated on the difference between the buying/selling rate and the Reserve Bank of India (RBI) reference rate.
This valuation method ensures a fair tax application while keeping the process transparent for businesses and individuals engaging in foreign exchange transactions under GST on foreign exchange in India.
Formula:
- For Buying Foreign Currency: (RBI Reference Rate – Buying Rate) × Total Units of Currency
- For Selling Foreign Currency: (Selling Rate – RBI Reference Rate) × Total Units of Currency
For example, if a person exchanges 1,000 USD to INR at a conversion rate of 1 USD = INR 74, while the RBI reference rate is INR 73, the taxable value is calculated as the difference between these two rates multiplied by the total amount exchanged.
Calculation:
- Exchange Rate Given by Money Changer = INR 74 per USD
- RBI Reference Rate = INR 73 per USD
- Difference = INR 74 – INR 73 = INR 1 per USD
- Total Taxable Value = INR 1 × 1,000 USD = INR 1,000
- GST (18% on INR 1,000) = INR 180
Thus, the individual will have to pay INR 180 as GST on this foreign exchange transaction.
Method 2: Slab-Based Percentage on Gross Amount Exchanged
For smaller forex transactions, GST on foreign exchange in India is calculated based on predefined slabs. This method provides a structured approach to taxation, ensuring fairness across different transaction sizes while maintaining tax efficiency for frequent forex users.
- Up to INR 1,00,000: 1% of the amount exchanged or a minimum of INR 250, whichever is higher.
- Between INR 1,00,001 and INR 10,00,000: INR 1,000 plus 0.5% of the amount exceeding INR 1,00,000.
- Above INR 10,00,000: INR 5,500 plus 0.1% of the amount exceeding INR 10,00,000 (capped at INR 60,000).
For example, if you exchange INR 5,00,000, the taxable value is calculated based on a slab system:
- GST is then applied at 18% on INR 3,000, resulting in a GST payable of INR 540 (INR 3,000 × 18%).
- A fixed INR 1,000 is charged for the first INR 1,00,000.
- For the remaining INR 4,00,000, a 0.5% rate applies, which equals INR 2,000 (0.5% of INR 4,00,000).
- The total taxable value comes to INR 3,000 (INR 1,000 + INR 2,000).
This structured slab-based approach ensures the proper application of GST on foreign exchange in India without creating excessive tax burdens on smaller transactions.
GST on Foreign Currency Transactions Involving Two Foreign Currencies
If both currencies involved are foreign (neither is INR), GST on foreign exchange transactions is calculated as 1% of the lower converted amount in INR. This method simplifies tax calculation and ensures uniformity in tax treatment across various forex transactions. By applying GST on foreign exchange in India, authorities maintain transparency and prevent tax evasion in cross-border transactions.
For example, if 10,000 USD is exchanged for Euros:
- 1 USD = INR 73, and 1 Euro = INR 85.
- INR equivalent of 10,000 USD = INR 7,30,000.
- Converted Euros = 10,000 × (73/85) = 8,588 Euros.
- INR equivalent of 8,588 Euros = INR 7,29,980.
- GST at 18% on 1% of INR 7,29,980 results in a tax of INR 1,313.96. This calculation highlights how GST on foreign exchange in India is implemented to standardize tax assessment and ensure compliance with Indian tax laws.
GST on International Remittances and Forex Cards
GST on Inward Remittances
Inward remittances refer to money received from foreign countries. Remittances to India are not subject to GST, as they qualify as export services and are zero-rated. However, service charges levied by banks for processing such transactions are taxable.
Understanding this aspect of GST on foreign exchange in India ensures that individuals and businesses receiving foreign payments remain compliant and avoid unnecessary tax liabilities.
GST on Outward Remittances
Sending money abroad is a taxable service under GST on forex remittances. Banks and forex dealers charge a processing fee, which attracts 18% GST. For instance, if a bank charges INR 1,000 as a fee, the applicable GST will be INR 180.
Staying informed about GST on foreign exchange in India helps individuals and businesses manage their cross-border payments effectively.
GST on Forex Cards and Online Forex Transactions
GST in India applies to Forex Cards and Online Forex Transactions, impacting currency exchanges for travel and digital payments. Understanding the applicable GST rates and calculation methods is essential for compliance. Let’s explore how GST is levied on each of these forex transaction types.
- Prepaid Forex Cards: Loading or reloading forex prepaid cards is considered a foreign exchange transaction and is taxed based on the slab method. This is an essential aspect of GST on foreign exchange in India, especially for frequent travelers.
- International Online Payments: When making payments in foreign currencies via Indian debit/credit cards, GST applies only to service charges levied by the bank. Keeping track of such charges ensures compliance with GST on foreign exchange in India and helps in financial planning.
Exemptions and Special Cases Under GST on Forex Transactions
Certain forex transactions are exempt from GST on foreign exchange in India. Understanding these exemptions can help businesses and individuals reduce tax liabilities while ensuring compliance.
- Forex services provided by SEZ units: Businesses operating in Special Economic Zones (SEZ) enjoy exemptions from GST on foreign exchange in India for transactions that qualify as export services.
- Government-Authorized Remittances: Certain transactions, such as government-to-government remittances and aid payments, may be exempt from GST.
- Transactions Under Threshold Limits: Small-value transactions below a specific threshold may not attract GST, depending on regulatory norms.
Impact of GST on Foreign Exchange in India for Businesses and Individuals
The introduction of GST on foreign exchange in India has streamlined tax compliance for forex service providers and individuals. While the taxation structure ensures uniformity, it also affects the cost of currency conversion and international transactions.
Businesses dealing in frequent forex transactions should implement proper tax planning strategies to minimize GST liabilities. Individuals engaging in forex transactions should be aware of service charges and associated taxes to make informed financial decisions.
Also Read: Travelling to London for studies? Read about Currency Exchange in London and get complete information about the same.
Best International Money Transfer Services in India
The following are the best international money transfer services in India, which also comply with low GST on Foreign Exchange in India:
- Fly Forex: Fly Forex is a new-age digital platform facilitating international money transfers. It is a cost-effective service that uses real-time exchange rates that are cheaper than banks. It ensures safe and secure transfer and has global licensed partners. It provides a hassle-free service with a 100% online application and KYC process
- Money2India: ICICI bank-supported remittance service that supports money transfers to India only. This provides quicker service to ICICI bank users. It offers competitive exchange rates and 24/7 customer service.
- MoneyGram: It is another popularly used money transfer platform for international transactions. It provides value-for-money services with broader accessibility payment methods, credit card and debit cards, bank loans and online and in-person services.
We hope this blog has provided you with relevant information on what GST on Foreign Exchange in India is. To know about education loans, the loan application process, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
FAQs on GST on Foreign Exchange in India
GST on Foreign Exchange in India refers to the tax levied on currency conversion services offered by banks, money changers, and financial institutions. It applies to forex transactions such as international remittances, travel currency exchange, and trade-related forex conversions. GST is levied at 18% on the taxable value of the transaction.
Yes, the GST charges are levied to exchange one currency for another. Thus, if you exchange any foreign currency (purchase or sale) from any currency exchange providers or banks, you will have to pay GST in addition to the conversion fees charged by them.
GST on Foreign Exchange in India is calculated using two methods:
Method 1: Based on the difference between the buying/selling rate and the RBI reference rate.
Method 2: A slab-based percentage on the total amount exchanged.
GST on forex conversion means that the Goods and Services Tax applies when one type of currency is exchanged for another.
Fly Forex: Fly Forex is a new-age digital platform facilitating international money transfers.
Money2India: ICICI bank-supported remittance service that supports money transfers to India only.
MoneyGram: It is another popularly used money transfer platform for international transactions.
GST on foreign exchange is calculated depending on the amount of forex currency transactions. The calculation is divided into 3 slab categories and for each slab category, a different tax percentage is calculated.
Generally, GST is applicable to most forex transactions where the currency is exchanged for another. However, there may be exceptions or specific types of transactions exempt from GST, depending on local regulations.
The slab-based method work for GST on forex transactions in such a way that:
Up to INR 1,00,000: 1% of the exchanged amount (minimum INR 250).
INR 1,00,001 to INR 10,00,000: INR 1,000 + 0.5% of the amount exceeding INR 1,00,000.
Above INR 10,00,000: INR 5,500 + 0.1% of the amount exceeding INR 10,00,000 (capped at INR 60,000).
No, inward remittances to India are exempt from GST as they qualify as export services. However, banks charge GST on service fees for processing such transactions.
Yes, prepaid forex cards are subject to GST under the slab-based method when loading or reloading funds. International online payments made using Indian credit/debit cards attract GST on bank service charges.
Yes, exemptions under GST on Foreign Exchange in India include:
Forex services provided by SEZ units.
Government-authorized remittances.
Small-value forex transactions under certain regulatory thresholds.
If neither currency in the transaction is INR, GST is charged at 1% of the lower INR equivalent of the two currencies exchanged, ensuring uniform tax treatment.
