Taxation & Compliance
Posted on Dec 4, 2024
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While export services are considered zero-rated under GST, it doesn't mean you can skip the paperwork. On top of that, there’s GST on foreign exchange conversions that often goes unnoticed until it shows up as an extra charge on your payment. Add to this the regular GST filings, and the entire process can feel like a maze, especially if you're just starting out as a freelancer or exporter.
In this guide, we’ll explain how GST applies to foreign transactions and currency conversions.
What Is GST on Foreign Exchange?
GST in India applies to the supply of goods and services, including those crossing international borders. Under the Integrated Goods and Services Tax (IGST) Act, the tax is levied on:
1. Imports of Goods and Services:
Imports are treated as interstate supplies and attract IGST, along with customs duties and other applicable charges.
2. Exports of Goods and Services:
Global exports are categorised as "zero-rated supplies," allowing businesses to claim input tax credits (ITC) on GST paid during production. However, you must submit a Letter of Undertaking (LUT) on the GST portal. If you don’t file an LUT, you’ll have to pay IGST on your export invoices and then apply for a refund later, which adds time and complexity to your cash flow.
3. Foreign Exchange and Currency Conversion Services:
Services involving currency exchange and foreign exchange transactions also fall under the GST framework.
GST on Foreign Exchange Conversion
When you receive international payments in USD, EUR, or any other foreign currency, banks or payment platforms charge GST on the currency conversion service. Remember that GST is not charged on the full transaction amount.
GST on FX conversion is calculated based on a predefined slab:
1% on transactions up to ₹1,00,000.
0.5% on transactions between ₹1,00,001 and ₹10,00,000.
0.1% for amounts exceeding ₹10,00,000 (minimum ₹250).
Businesses involved in regular forex transactions, such as exporters and importers, need to pay for these charges when managing cross-border payments.
Who Determines GST on Currency Exchange Charges?
For GST calculations, the custom exchange rate determined by the Reserve Bank of India (RBI) is used. This rate ensures uniformity in tax computation across transactions.
Tax on Currency Exchange and FX Conversion:
These taxes contribute to the overall cost of cross-border payments, making it critical for businesses to optimise their transactions to minimise expenses.
Related: FEMA Compliance Tips for Exporters and Businesses
Impact of GST on Foreign Exchange for Different Users
For Importers:
Importers must pay IGST at the time of customs clearance. This tax is added to the cost of imported goods, increasing the landed cost. However, businesses can claim ITC if the imports are used for taxable supplies.
For Exporters:
Exporters benefit from GST's zero-rated provisions, which reduce their tax burden. They can claim refunds for the GST paid on input goods and services.
On Forex and Remittance Services:
GST on forex services and currency conversions has increased the cost of sending and receiving money internationally. Businesses must factor in these costs during cross-border payment planning.
On the Economy:
GST ensures transparency and compliance in cross-border transactions, reducing the prevalence of tax evasion. However, it also increases administrative efforts for businesses.
GST Compliance Checklist for Foreign Exchange Transactions
Here’s all the information and documents you need to follow GST on foreign exchange.
1. GST Registration
Register for GST if your turnover exceeds the threshold limit, which is annual turnover of INR 20 lakhs
Follow the regular GST registration, not the composition scheme, for exports
2. Export of Goods
Classify exports as zero-rated under GST
File a Letter of Undertaking (LUT) to export if you don’t want to pay IGST
Maintain export invoices, shipping bills, and e-way bills for proof
Report exports in GSTR-1 and GSTR-3B
Claim input tax credit (ITC) on inputs used for exported goods. This means you can claim ITC for GST paid on raw materials, packaging, or logistic charges
If IGST is paid, file refund using Form RFD-01
3. Export of Services
Ensure the recipient is located outside India
Receive payment in convertible foreign currency
File an LUT for zero-rated service exports
Maintain proof of payment and service agreements
Report export invoices in GSTR-1 and GSTR-3B
Claim ITC on business expenses related to the export
4. Foreign Exchange Conversion
Check slab rates for GST on currency conversion
Collect GST invoices from banks or payment platforms
Claim ITC on forex-related GST only if used for business
5. Refunds and Record Keeping
File RFD-01 to claim a GST refund if IGST was paid on exports
Maintain records of LUTs, invoices, FIRCs/e-FIRCs, GST filings, and refund claims
Reconcile GST returns with payment receipts regularly
Store all export-related documents for a minimum of six years
Ensure periodic return filing
Use GST e-invoicing and automate accounting and tax management software to streamline GST compliance
Latest 2025 Updates on GST for Foreign Exchange Services
RBI Guidelines on Cross-Border Payments:
The Reserve Bank of India (RBI) recently revised its regulatory framework for payment aggregators, ensuring better compliance and oversight of cross-border transactions
GST Council Decisions:
The GST Council periodically reviews and updates tax rates and rules, impacting cross-border payments. Businesses must stay updated with these changes to avoid non-compliance.
Tips to Manage GST on Forex Transactions in India
Leverage ITC:
Claim input tax credits on eligible transactions to offset your GST liabilities, especially on foreign conversion charges or platform fees.
Choose Cost-Effective Payment Methods:
Explore digital platforms or fintech solutions offering lower transaction fees to reduce overall costs.
Plan Forex Transactions Strategically:
Monitor forex rates and plan conversions during favourable market conditions to minimise GST and other charges.
Consult Experts:
Engage with tax advisors or consultants to navigate the complexities of GST on cross-border payments.
Conclusion
GST on cross-border payments plays a pivotal role in India's taxation framework, impacting businesses, exporters, and service providers. While it brings transparency and uniformity, it also adds layers of compliance. By understanding the nuances of GST on foreign exchange, currency conversion, and other related aspects, businesses can optimise their financial strategies and ensure smooth cross-border operations. Staying informed about policy updates and leveraging available tax benefits will enable businesses to thrive in the global market.
For the latest updates and detailed guidelines, consult the official GST portal or seek professional advisory services.
FAQs for GST on Foreign Exchange
1. Is GST applicable on sending money abroad?
Yes, GST is applicable when you send money abroad and receive international payments. It is charged on the currency conversion service, not the amount transferred. This fee is automatically deducted by banks, money transfer platforms, or forex service providers.
2. What is the GST on foreign currency exchange in India?
GST on foreign exchange follows a slab-based structure:
Up to ₹1,00,000: 1% of the amount (minimum ₹250)
₹1,00,001 to ₹10,00,000: ₹1,000 + 0.5% of the amount over ₹1,00,000
Above ₹10,00,000: ₹5,500 + 0.1% of the amount over ₹10,00,000 (maximum ₹60,000 GST)
3. How to calculate GST on forex conversion?
GST is calculated on the currency conversion, using the government’s slab rates. The bank or service provider usually calculates and deducts it automatically at the time of the transaction.
4. Can I claim GST on currency conversion?
Yes, you can claim GST paid on currency conversion. However, you need to fulfil three conditions:
You should have GST registration
The forex service was used for taxable business activities
The invoice from the bank or provider clearly shows the GST amount
