The foreign exchange business

MUMBAI: The foreign exchange business went into a tizzy on Friday as a service tax on forex broking services came into effect. For retail customers, the levy makes buying and selling forex more expensive as most banks have hiked rates on transactions. However, confusion prevailed in the wholesale part of the business, which constitutes over 60% of foreign exchange sales in India. Several dealers in Mumbai suspended business, awaiting clarity on the levy.

The notification issued by CBDT says both ends of the forex transaction—buying and selling—would be taxed, on the lines of the securities transaction tax, which is applicable on stock market trades. Wholesale forex dealers, such as banks and full-fledged money changers (FFMC), say this would make the business unviable and complex. ``Margins on large forex transactions are wafer-thin, between 0.35% and 0.75%, and if 0.25% of this is paid as tax, there is nothing left,” said a representative of a large Mumbai-based forex dealer. Many FFMCs on Friday bought only about 5% of their normal forex requirement, preferring to wait for clarifications, market sources said.

The Foreign Exchange Dealers Association of India and the Indian Banks Association (IBA) are planning to take up the matter in a meeting with the finance ministry next week. Large banks and FFMCs, such as Travelex, Feroz Framroze and Reliance Money, dominate the bulk of the wholesale business. They buy most of their forex from authorised dealers like Thomas Cook India and banks. Their contention is that a dealer-to-dealer transaction should not be charged.

Speaking to ET, Thomas Cook India chief financial officer Vinayak Purohit said there is still a lot of confusion on the service tax issue. TCIL is the largest organised player in the forex business and did transactions worth over Rs 10,000 crore last year. About 60% of these are bulk deals with banks and other forex dealers. For large deals, the impact of the new tax could be substantial.

The impact on the retail trade is clearer, and smaller forex outfits—called restricted money changers in RBI classification—have already begun charging customers at either 0.25% of the transaction cost or a flat processing fee plus 12.36% of the fee as a service fee. The fixed fee varies between Rs 100 and Rs 500, depending on the size of the transaction. New rates have been put into effect by leading players like Citibank, HDFC Bank, Centurion Bank of Punjab while others like Union Bank and Bank of India are still awaiting instructions, industry sources said.