Foreign exchange fluctuation income booked

[Raam Srinivasan Swaminathan Kalpathi]

The client had booked foreign exchange translation and transaction income on account of appreciation in US$ rate. This was religiously reported in GSTR-9C for reconciliation purposes. Department is now demanding GST on this amount. This simply is a notional entry to be mandatorily provided as per Accounting Standard-11 and Rule 34. There is no supply here. There are case laws of the Service-tax era. Sincerely request experts to provide their valuable suggestions. Thanks

[Sadanand Bulbule]

The Department's demand is legally untenable as foreign exchange gain is a mandatory accounting adjustment under AS-11/Ind AS 21, not a taxable supply. Under Section 7 of the CGST Act, GST requires a supply of goods or services, whereas currency appreciation pertains strictly to "money," which is explicitly excluded from tax under Section 2(52/102).

Furthermore, Rule 34 of the CGST Rules fixes export valuation at the time of supply, meaning subsequent exchange rate gains do not increase taxable turnover. Reporting this gain in GSTR-9C merely reconciles P&L accounting standards with GST returns, and filing a CA-certified reconciliation explaining this non-supply entry is sufficient grounds to have the demand dropped.

AI Summary

Foreign exchange translation gains: GST applicability turns on whether mandatory notional accounting entries constitute a taxable supply. GST applicability is questioned for foreign exchange translation and transaction income arising from US dollar appreciation. The amount was reported in GSTR-9C for reconciliation and is described as a mandatory notional accounting entry. The issue is whether unrealised foreign exchange income, absent an underlying supply, can attract GST.