GST in Banking sector and GST on Forex

GST in Banking sector and GST on Forex




Banking is an integral part of the financial system and also the backbone of global economies. The banking industry provides a wide range of services to its clientele. Majority of the services rendered by Banks fall under the purview of GST.



In India, Banks are governed by various statutes, some of which are-


  1. Companies Act, 2013
  2. Reserve Bank of India Act, 1934
  3. Banking Regulation Act, 1949
  4. Prevention of Money Laundering Act, 2022
  5. Information Technology Act, 2000
  6. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2022.

vGoods and Services Tax Act, 2017.


This module helps you to understand the impact of GST on the Banking Industry and Forex dealers.


Let’s get started!!!


GST on Forex dealers:


The Foreign Exchange Dealer Association of India (FEDAI) is an association of banks dealing in foreign exchange in India (typically called Authorised Dealers- AD’s). As of June 2022, there are 94 Banks (which include public sector, private sector, co-operative and foreign banks)

Forex trading involves the buying and selling of currencies. Authorised forex dealers facilitate the trading of currencies for retail clients and/or businesses.

The taxable event under GST is ‘Supply’. GST is levied on the supplies of ‘Goods’ or ‘Services’ or both. Now, the moot question arises, as to whether the forex trading is considered as a ‘Supply’ of ‘Goods’ or ‘Services’.




Whether the act of buying

Supply of ‘Services’.

and selling   of   currencies


amounts     to      Supply      of

Sec 2(102) of CGST Act 2017, the extract of the same is as follows.

“Goods” or “Services.”

“Services means anything other than goods, money and securities but


includes activities relating to use of money or its conversion by cash or by


any other mode, from one form, currency or denomination to another form,


currency, or denomination for which a separate consideration is charged.”



Thereby, it is very clear from the aforesaid definition that forex trading, which involves conversion of money from one currency to another, and a commission is charged from the customers for the said act, would

tantamount to ‘Services’.

Classification of service (SAC code)

Services Accounting Code (SAC) 997157.

The extract of the explanatory note is as follows.

Foreign exchange services: This service code includes foreign currency exchange services provided by bureau de change, etc.

Rate of Tax

@18% [CGST-9% + SGST-9%] in light of clause (vii) of Entry 15 to the

Notification 11/2017-CT(Rate) dated 28.06.2017.


In light of clause (b) of entry 27 to Notification 12/2017-CT(Rate) dated 28.06.2017, the following services are exempt.

“Inter se sale or purchase of foreign currency amongst the banks or authorised dealers of foreign exchange or amongst banks and such dealers”

What is the Value on which GST is to be paid??


Sec 15 of CGST Act provides that the value of supply shall be the ‘Transaction value” if the transaction satisfies the following two conditions.

  1. Price is the sole consideration.
  2. Supplier and recipient are not related parties.


Thereby, the commission (called as ‘Spread’ or ‘Margin’) charged by the dealers would be the value of supply on which GST shall be levied.



Mr. Ramanujan landed at Bangalore Airport and is having $ 1,00,000 cash, now he wants to exchange the

‘Dollars’ into ‘Rupees’. The Authorised dealer at the Airport is quoting 1 $ = ₹ 80/ ₹85. Bid rate: $1 = ₹80 (The price at which the dealer is willing to buy the $)

Ask rate: $1 = ₹85 (The price at which the dealer is willing to sell the $)


In the instant case, the dealer is earning a margin of ₹5 per $, thereby for $1,00,000, the margin would be

₹5,00,000 (1,00,000 X 5) and GST @18% would be ₹90,000.


However, there is a special valuation mechanism provided for the money changers in GST law and the same is laid down under Rule 32 of CGST Rules 2017.

The valuation mechanism provides two methods for determining the value of the supply and the Forex dealers, at their option, can use them, if he desires.

Method-I: Based on spread and RBI reference rate:

Transaction, where one of the currencies exchanged, is Indian Rupees:

RBI reference rate available:

VOS = (BUY Rate/ SELL rate – RBI ref rate) X Total units of foreign currency.


RBI rate $1= ₹85

Buy rate of forex dealer, $1= ₹80

Now, Mr. Ramanujan wants to exchange


Margin earned by dealer is ₹ 5,00,000 and GST @18% would be ₹ 90,000



RBI reference rate not available:

VOS = 1% of gross amount of INR provided or received by the person changing the money.


Buy rate of forex dealer, $1= ₹80

Now, Mr. Ramanujan wants to exchange


Gross amount received by Mr. Ramanujan is


VOS = 1% of ₹80,00,000 = ₹80,000 GST = 18% of ₹80,000 = ₹14,400


Transaction, where neither of the currencies exchanged, is Indian Rupees:

VOS = 1% of lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by the Reserve Bank of India.


Mr. Ramanujan converts $ 1,00,000 into £ 83,000. RBI reference rates for $ and £ are as follows.

1$ = ₹85

1£ = ₹100

Now, converting the aforesaid currencies based

on the reference rates of RBI on the date of transaction.

$ 1,00,000


£ 83,000


Lower amount


Value of supply

1% of ₹83,00,000

= 83,000

GST @18%


Method II- Based on the slab rates:


Currency exchanged

Value of supply



Up to ₹ 1,00,000

1% of gross amount of currency exchanged OR

₹ 250, whichever is higher.

Currency      exchanged       is

₹70,000 [i.e., $1000 are sold by dealer @ ₹70/$]


VOS = 1% of ₹70,000

= ₹700 OR ₹250

Whichever is higher Therefore, VOS = ₹700

Value Of Supply X 18%

₹700 X 18% = ₹126

Exceeding ₹1,00,000

₹1,000    +    0.5%    of

Currency      exchanged       is

Value of   Supply   X

and up to ₹10,00,000

[Gross               amount

₹1,70,000 [i.e., $2,428.57 are




sold by dealer @ ₹70/$]

₹1,350 X 18% = ₹243




VOS = ₹1,000 + 0.5% [*]




= ₹1,000 + 0.5% X 70K




= ₹1,350





[*] = ₹1,70,000- ₹1,00,000




= ₹70,000



₹5,500    +    0.1%    of

Currency      exchanged       is

Value of   supply   X


[Gross      amount     of

₹10,70,000 [[i.e., $24,285.7



currency exchanged -

are sold by dealer @ ₹70/$]

₹5,570     X    18%                 =







VOS =₹5,500 + 0.1% [*]




=₹5,500 + 0.1% X 70K



Whichever is lower

=₹5,500 + ₹70
















Whichever is lower




i.e., VOS = ₹5,570




[*] = 10,70,000- 10,00,000




= ₹70,000




Note: Provided also that a person supplying the services may exercise the option to ascertain the value in terms of method-II, for a financial year and such option shall not be withdrawn during the remaining part of that financial year.


From the afore-discussed illustration and methodologies, it can be inferred that Method-II (i.e., based on slabs) of valuation of supply for the purpose of levying GST @18% would be suggestable for the Authorised dealers or money changers, as the value of supply and GST amount would be less.



GST on the Banking sector


Banks offer a wide variety of products (i.e., financial services) to their wide variety of clientele. W.e.f. 01st July 2017 GST is levied on the financial services rendered by Banks and thereby, the provisions of GST are equally applicable to Banks, just like any other business in the land of India.

However, there are certain specific provisions which are applicable exclusively to Banks, Financial Institutions, NBFC and Insurance companies.

Through this module, the author wishes to emphasize on few of the special provisions which are applicable to ‘Banks’.

  1. Levy and collection.
  2. Registration.
  3. Invoicing.
  4. Input Tax Credit (ITC).
  5. E-way bill.


Taxability of the financial services:


The main source of income for Banks ‘Interest’ from lending loans. Now, the question arises as to whether the ‘Interest’ income earned by Banks is taxable under GST?


SAC Code

99711 [Financial services except investment banking, insurance services and pension


GST rate

18% [CGST-9% + SGST-9%]

Clause (vii) of Entry 15 to the Notification 11/2017-CT(Rate) dated 28.06.2017.


Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);

Clause (b) of entry 27 to Notification 12/2017-CT(Rate) dated 28.06.2017,



Thereby, it can be understood that the ‘Interest’ income earned by Banks from credit card services is taxable @18% and exemption for the same is not available.


Reverse charge mechanism:


In normal cases, GST is paid by the supplier of goods or services, however, there are certain instances, in which GST is paid by the recipient of goods or services.

Here is the list of services as provided under Notification 13/2017-CT(Rate), under which Banks are required to pay GST under RCM, as a recipient of service.

  1. Services supplied by a recovery agent [Entry-8]
  2. Services supplied by Individual direct selling agents (DSA’s) other than a body corporate, partnership, or limited liability partnership firm. [Entry-11]
  3. Services provided by business facilitator [Entry-12]






The provisions relating to ‘Registration’ are provided under Sec 22 to 30 of CGST Act. It can be understood that as the Banks are engaged in rendering services the threshold limit to take registration would be Rs. 20 lakhs (Rs. 10 lakhs in the case of special category states like Nagaland, Manipur, Tripura, Mizoram).


Whether ‘Banks’ are required to take separate registration for each branch operating within a state?


Separate registration for each branch is not required, however, the details of each branch shall be included as ‘Additional place of business’ (APOB) and GST certificate should be displayed at the appropriate place at each branch.

Example: Axis Bank has 100 Branches in the state of Kerala. Single registration would be sufficient, however, details of other branches are to be

included as APOB.

Whether separate GST registration is to be taken


for each ATM?

Separate registration for each ATM is not required,


and also the details of each ATM need not be


included as   ‘Additional   Place   of   business’


(APOB), the reason being ATMs do not satisfy the


definition of ‘Place of business’ under GST.


[Clarified through Sl. No 1 of FAQ issued on


Banking sector]


Invoicing under GST:


The provisions relating to ‘Invoicing’ is provided under Sec 31 of CGST Act 2017. The gist of the same is discussed as follows;


Other than Banks, NBFC, and Insurance co.

Banks, NBFC, and Insurance co.

Tax invoice shall be issued within a period of 30 days from the date of supply of service.


[Sec 31(2) of CGST Act read with Rule 47 of CGST Rules 2017]

Outside customers:

Tax invoice shall be issued within a period of 45 days from the date of supply of service.


Distinct persons: [Registered under same PAN]

The Tax invoice may be issued

  • Before or at the time such supplier records the same in his books of accounts OR
  • Before the expiry of the quarter during which the supply was made.


[Sec 31(2) of CGST Act read with Rule 47 of CGST Rules 2017]




  1. For the exempted supply of services, Banks shall issue ‘Bill of supply’
  2. If the value of supply is less than Rs. 200, then Banks need not issue Tax invoice or Bill of supply, if all the following conditions are also satisfied.
    • The recipient is an unregistered person.
    • The recipient does not require such invoice or bill of supply.



In terms of Rule 48(4) of CGST Rules 2017, the registered person whose aggregate turnover in any previous financial year from 2017-18 exceeds the specified threshold, shall issue E-invoice with QR code having the embedded Invoice Reference Number (IRN) for B2B supplies and exports.


However, the same is not applicable to certain category of ‘Service providers’ as enumerated under Rule 54 in light of Notification 13/2020-Central Tax dated 21st March 2020.

Thereby, Banks, Financial institutions, Insurance companies and NBFCs are not required to issue E-invoice having QR codes with embedded IRN, for B2B supplies.

Certain issues relating to “Tax invoice’ are clarified through FAQs, the same are discussed below;


A customer may avail numerous services from the Bank / insurer in a given taxable period. Is it mandatory for Banks to issue a tax invoice for each transaction or can the Bank issue a consolidated invoice for the service rendered during the tax period? [Sl. No 10 of the FAQ]

As per the provisions contained in the first proviso to Rule 47 of the CGST Rules, 2017 an insurer, a banking company or a financial institution, including a NBFC may issue invoices within 45 days from the date of supply of service. Further, sub-rule (2) of rule 54 of CGST Rules, 2017 provides that such entities may issue any other document in lieu of the tax invoice. Accordingly, such entities may issue a consolidated statement/ invoice/ advice to the customer at the end of the month, with the details of all the charges levied

during such month and GST payable thereon.

When a banking company is not required to serially number its invoices / document for supply of its services, how will the service recipient get credit for GST on the services provided by the bank? [Sl. No 11 of the FAQ]








Under Rule 54(2) of the CGST Rules, 2017 a banking company or a financial institution including a NBFC or an insurer can issue an invoice or any other document in lieu thereof whether or not serially numbered and whether or not containing the address of the recipient but containing other information as mentioned under Rule 46. There is no restriction on the invoice/document being a consolidated invoice/document but it must bear an identification number, which need not necessarily be serially numbered. The recipient of service will get the credit for GST so long as the bank, etc. uploads the details of the invoice/document under that number with the GSTIN of the recipient in its

statement if FORM GSTR-1


Input Tax Credit:


The provisions relating to Input Tax Credit are provided under Sec 16 to 21 of CGST Act. The main objective of implementing GST is to remove cascading effect of taxes and allow seamless flow of credits. However, this will not hold good for Banks in light of certain provisions provided under Sec 17 of CGST Act.

GST law provides two options to Banks for availing and reversing the Input Tax Credit under GST.


The basic conditions as laid down under 16 of CGST Act shall be satisfied by the Banks for availing the ITC and on satisfaction of the same it would be treated as eligible credits. However, there are certain credits which are blocked under Sec 17(5), on which ITC is not available and thereby, they are termed as ‘Ineligible credits’

Option 1: General rule (i.e., Rule 42/43 reversals)


In terms of Sec 17(2) of CGST Act, where the goods or services are used by the registered person (i.e., Banks) partly for effecting

  • taxable supplies (including zero-rated supplies) and
  • exempt supplies


then the amount of credit is restricted only towards the input tax attributable to taxable supplies.


Meaning thereby, ITC attributable to exempt supplies shall be reversed in compliance with the Rule 42 and 43 of the CGST Rules 2017. Since banks has both taxable and exempt supplies on the outward leg, they would be entitled to avail the ITC as derived from the aforesaid rules.



Outward taxable supplies

Rs. 15,00,000

Outward exempt supplies

Rs. 40,00,000

Total turnover

Rs. 55,00,000

Eligible ITC- attributable to taxable supplies

Rs. 5,00,000

ITC attributable to exempt supplies

Rs. 7,00,000

Common ITC

Rs. 9,00,000

Total ITC that can be availed in compliance with

Rule 42.

Rs. 7,45,455.

[5,00,000 + 9,00,000 X 15,00,000/55,00,000]



Option 2: 50% credit rule


Banks has an option not to calculate the eligible ITC to be availed under Rule 42 and 43 and directly they can avail 50% of the eligible ITC and the other 50% ITC would lapse, these shall be done on a monthly basis.

Once the 50% rule is adopted by the Banks, they can not shift to the other option within the same financial year. However, they can opt for the other option in the next financial year.


This rule is not applicable on the invoices received from distinct persons, in terms of the second proviso to Sec 17(4) of CGST Act 2017.


Eligible ITC- attributable to taxable supplies

Rs. 5,00,000

ITC attributable to exempt supplies

Rs. 7,00,000

Common ITC

Rs. 9,00,000

Total Eligible ITC

Rs. 14,00,000

ITC available as per Sec 17(4)

Rs. 7,00,000

[Rs. 14,00,000 X 50%]

ITC lapsed

RS. 7,00,000





Whether one Bank registered in the state of Karnataka can opt for 50% rule and its branch in Kerala opt for general rule?

Well!! The answer is ‘Yes’, as the persons who have taken GST registration would be treated as distinct for the purposes of GST even if they are registered under the same PAN and Sec 17(4) is applicable qua each registration and not for the bank as a whole.



E-way bill:


The provisions relating to Electronic Way bill (hereinafter referred to as ‘E-way bill’) are provided under Rule 138 of CGST Rules 2017.


Banks deploy various equipment such as Point of Sale machines or ATMs at various locations. At times, the equipment is required to be moved between locations for the purpose of repairs, encryption, etc. Will such movement constitute a supply for the purpose of the GST law?

[FAQ- Sl. No 15]

E-way bill is required when the consignment value exceeds Rs. 50,000 and the movement of goods shall be accompanied by ‘Delivery challan’ for the below discussed reasons.


Procedure prescribed under Section 143 of the CGST Act, 2017 and Rule 55 of the CGST Rules, 2017 may be followed in such cases. Movement of equipment for the purpose of repairs, etc. does not constitute a supply. The equipment may be moved by the Banks to the location of the third party service providers and after repairs, the equipment may be moved to a central / regional location for the     purpose     of     programming,     encryption,

reconfiguration, etc. and thereafter to that place of



business from where the equipment had been sent earlier. The equipment can be moved between such locations on the basis of a ‘delivery challan’

Transportation of currency from one place to another require E-way bill?


Example: SBI wants to move notes worth of Rs. 5 crores in a truck, whether E-way bill is required?





E-way bill is required for movement of goods and ‘Money’ is not a ‘Good’ under GST and thereby, E- way bill is not required.


In addition to this, Currency is covered in the Annexure notified under Rule 138(14), which provides for the transactions for which e-way bill is not required.







Share this post