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Bank profits may be hit by service tax
June, 02nd 2008

All forex transactions have gotten costlier by about Rs 100, because of the imposition of service tax. However, the bigger problem for banks is paying service tax on all interbank foreign exchange transactions. This could wipe out profits.

 You may not have noticed it but you are perhaps paying a little more every time you buy from or sell foreign currency to a bank. That is because service tax has been imposed on all your foreign exchange transactions. Several banks have started levying a flat fee of Rs 112.36 on all forex services from May 16.

 Under the new rules, banks will be taxed 0.25% of all forex amount transacted, or 12.36% of the fee they charge on forex transactions.

 This is an option given to the bank. If it knows the value or if it wants to ascribe a value to this particular activity, it is open to the bank or an entity given to ascribe a value and pay an applicable service tax at an applicable rate i.e 12.36%, said Uday Pimprikar, Associate Director, E&Y.

 The big problem for banks is that they have to pay this 0.25% tax on their inter-bank forex transactions as well as transactions with the RBI.  The Indian Banks' Association is meeting the central board of excise and customs next week to reconsider this clause.

 There are certain operational issues arising out of this which we are discussing. We are going to hold a meeting next week and whatever loose ends are available, we will try and sort it out, said H Sinor, Chief Executive, Indian Banks Association.

 Bankers point out that daily transaction in the market amount to USD 33 billion. In 240 working days, this will be USD 7.9 trillion and 0.25% of this will amount to USD 20 billion in service tax. That is a figure that can wipe out half the oil subsidy as well as the profits of all the banks. So, it looks like a rethink of this clause should come soon.

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