The Kerala High Court has held that service tax can be levied on the fees and commissions charged by banks for converting overseas remittances into rupees, a ruling that is seen as a setback for exporters.

While dismissing a writ petition filed by Palm Fiber, a Kerala-based manufacturer and exporter of products such as doormats and floor coverings, the court said it did not find any illegality in levying the tax since conversion of foreign currency is a service provided by banks.

It said the difference that the bank earns while buying currency at a lower rate from the market and converting it at Reserve Bank of India rates can be considered for charging service tax.

The company had filed a case against Union Bank of India and revenue authorities, arguing that it wasn't liable to pay the tax on foreign currency remitted to India, and if at all tax was to be levied; it should be on the gross charge levied by the bank for the service rendered. The company had sought to stop the bank from levying the tax and also asked for a refund on the money already deducted.

"Under the current service tax provisions, the high court decision seems to be justified," said Sachin Menon, COO for tax and national head for indirect tax at KPMG."However, in effect, it means that an exporter is indirectly getting taxed on his foreign exchange earning against exports."