GST on Foreign Exchange: A Complete Guide

With the introduction of GST in 2017, India's once-complex taxation system was replaced with a simplified and unified structure that subsumed multiple indirect taxes applied to the sale of goods and services. However, when it comes to the export of goods and services to foreign clients or the conversion of foreign currency, GST doesn't follow a one-size-fits-all approach. 

Instead, these cross-border transactions are governed by a distinct set of rules, especially designed to accommodate the complexities of international trade and forex services.

• In India, foreign currency exchange services are subject to 18% GST, but this tax isn’t levied on the total value of the transaction. Instead, it applies only to the service fee charged by banks or authorized forex dealers. GST is also applied to the service charged by banks and authorized dealers to issue export certification documents like FIRC and BRC. 

• There is no GST charged on inward remittances or payment received in exchange for export of services or goods. This is because exported goods and services fall under the zero-rated supply category as per the Section 16 of the IGST Act.

• GST on foreign exchange of currencies is calculated based on two methods. The slab-based method applies fixed percentages based on the total amount exchanged, using tiered slabs with minimum and maximum limits. The calculation-based method calculates the difference between the exchange rate offered and the RBI reference rate, or 1% of the gross amount if no reference rate exists.

GST on foreign exchange mainly refers to the amount of GST that applies when one currency is exchanged for another currency. Usually, it's an authorized dealer or bank that performs these exchange services. Essentially, the GST is actually applied to this service value and not to the amount of currency being exchanged.

The exact amount of GST to be charged is calculated with the help of sophisticated methods prescribed under Rule 32 of the CGST Rules.

A GST of 18% is charged on foreign currency exchange services. As per Rule 32 of the CGST Rules, the manner in which GST on foreign exchange is calculated depends on two methods: Slab-based and Calculation-based. Let's have a detailed look at each of these methods.

1. Calculation-based

This method is all about the spread, which is the difference between the rate offered to the customer and the official RBI reference rate.

Example:

If you sell AUD 7,000 to a bank at ₹56 per AUD, but the RBI says the rate is ₹55.40 per AUD, the markup is ₹0.60 per AUD.

So, ₹0.60 × 7,000 = ₹4,200 is the service value, and GST at 18% applies to this ₹4,200. So, you’ll pay ₹756 as GST on this foreign exchange service.

But what if the RBI doesn’t publish the rate for that currency? Then, GST is calculated on 1% of the total rupee amount paid or received.

Special case: Neither currency is INR

Sometimes, you’re converting foreign currencies where no rupee is directly involved, say, USD to GBP.

In that case, GST is charged on 1% of the lower value of the two currencies, once both are converted to INR.

Example:

A business converts its earnings from USD to GBP to pay suppliers.

Let’s say: $1 = ₹84; £1 = ₹98

If you're exchanging $10,000 (₹8,40,000) to get £8,571 (₹8,39,958),

then GST is charged on 1% of ₹8,39,958, i.e., ₹8,399.58.

GST = ₹1,511.92 (at 18%)

2. Slab-based 

This method uses fixed percentages based on the total INR amount exchanged. Here’s how the slabs break down:

You may think that 18% GST sounds like a huge tax deduction, but since it’s applied on the value of service, the actual amount of GST turns out to be a very small portion of the currency transaction.

For businesses exporting services to their international clients, the GST is not applicable to the payments they receive in exchange for those services. This is largely because exports of goods or services come under the zero-rated supplies of GST under Section 16 of the IGST Act. 

However, exporters can benefit from the Input Tax Credit feature of GST even when they have to pay no GST at all on inward remittances. 

Bonus tip: To claim zero-rate export benefits under GST, make sure you have proper documentation ready in the form of FIRC and BRC that validates your export proceeds.  

International payment platforms like Xflow provide free FIRC with each transaction, helping you save time and money that traditional banks require to issue FIRC.

After exporters receive payments from their international clients, their bank issues an FIRC (Foreign Inward Remittance Certificate) and a BRC (Bank Realization Certificate). While the former is proof of money being sent to your bank account, the latter serves as evidence of export proceeds being realised in India. 

To obtain these documents from your bank, you'll need to visit it multiple times and even pay a small fee. An additional 18% GST is also added to the service fee that banks charge for issuing an FIRC or BRC. 

Here are some of the essential documents you need to maintain proper GST compliance:

• Form A2, which is used in case of outward remittances. 
• FIRC/BRC that serves as evidence of foreign currency export proceeds
• Shipping bills and export documents like invoices and contracts
• Bank statements that depict foreign currency conversion
• Digital versions of all GST-associated documents, like GST returns and challans

Some common challenges one might face when paying GST include:

• Payment not showing instantly: Don’t worry if payment is not reflected on the portal. It usually takes up to 24 hours for your GST payment to sync across systems. Give it a day before raising a flag as most issues resolve on their own.

• Money deducted but not reflected: If the amount was debited from your account but hasn't been reflected in your GST dashboard, it's time to take action. Lodge a complaint on the GST portal to initiate the reconciliation process.

• Missed deadlines: If a GST filing deadline is missed, 18% interest per annum is charged daily until payment is made, and a penalty of ₹10,000 or 10% of the unpaid tax, whichever is higher, is also charged. To avoid this, set up automated reminders and keep your electronic cash ledger sufficiently funded.

Whether you're a SaaS founder, freelancer, or global service provider, these GST tips will keep your international payments efficient and compliant:

1. Stick to RBI-approved conversions

Always use RBI-authorized banks or platforms to receive payments in foreign currency. They calculate GST correctly, follow government slabs, and issue proper invoices that are input tax credit-friendly.

2. Clearly label your export invoices 

When sending export invoices to international clients, you can add a clear note like "Export of Services-IGST Zero-Rated under Section 16." If your payment partner charges a service fee with GST, ensure it’s listed as a separate line item. This avoids mix-ups and smoothens compliance.

3. Have proper export documents

Collect and store your FIRCs, BRCs, bank advice slips, or transaction statements. These documents come in handy when filing for zero-rated supply or claiming input tax credit.

4. Keep yourself updated

While the core GST rules on exports haven’t changed much since 2017, minor updates may arise. To stay updated, you can subscribe to a GST update newsletter or follow a reliable CA.

Exporters receiving payments from international clients are exempt from GST charges. However, services related to foreign exchange conversion and the issuance of mandatory certificates like FIRC or BRC do attract an 18% GST, as they’re treated as domestic taxable services.

The process can be simplified by following some best practices, such as using only RBI-authorized platforms and banks to receive payments, maintaining proper documents, and keeping yourself updated with changes in GST regulations or policies.

For businesses receiving cross-border payments, Xflow offers a reliable and streamlined solution. With Xflow, you can save 50% on FX costs, receive payments without any transaction limits, have complete visibility in your transactions with no hidden fees or surprise markups. 

Xflow also issues a free FIRC with every transaction, ensuring easy compliance with RBI and FEMA guidelines. Sign up with Xflow now to simplify your global transactions!