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.

[Sanjeev Agarwal]

A concise response (within 2,500 characters) could be as follows:

In my view, the demand is not legally sustainable if it is based merely on the inclusion of foreign exchange fluctuation income in the GSTR-9C reconciliation. The amount represents notional accounting income arising from year-end restatement of foreign currency monetary items in accordance with AS-11/Ind AS 21. It is an accounting adjustment and not consideration for any supply of goods or services.

GSTR-9C requires reconciliation of turnover as per the audited financial statements with turnover declared in GST returns. Consequently, items such as foreign exchange fluctuation gain appearing in the Statement of Profit and Loss are disclosed only for reconciliation purposes. Such disclosure does not determine taxability under the CGST Act.

GST is leviable only on a "supply" under section 7 of the CGST Act. A notional foreign exchange translation gain does not involve any supply, consideration, or independent transaction with a customer. It merely reflects the impact of exchange rate movement on outstanding foreign currency monetary assets or liabilities as on the balance sheet date.

It is also important to distinguish between:

(i) realized foreign exchange gain arising on actual settlement of an underlying taxable supply, which ordinarily forms part of the value of that supply in accordance with section 15 read with Rule 34 of the CGST Rules, and

(ii) unrealized/translation gain recognized at the year end under AS-11, which is purely notional and does not arise from any supply.

The Service Tax jurisprudence has consistently recognized that mere foreign exchange fluctuation or accounting entries, in the absence of an independent service, do not constitute a taxable service. The same principle supports the GST regime since the charging event continues to be "supply" and not accounting recognition.

Therefore, if the amount reflected in GSTR-9C is purely an unrealized foreign exchange translation gain recognized under AS-11, it is only a reconciliation item and cannot be subjected to GST merely because it appears as "Other Income" in the financial statements. The reply to the notice should clearly explain the accounting treatment, distinguish realized and unrealized gains, and emphasize that no taxable supply has occurred.

[Raam Srinivasan Swaminathan Kalpathi]

My sincere appreciation for the support provided by both the respected experts. Most obliged.

[Shilpi Jain]

You are right to say that there is no GST on notional entries.

[Shilpi Jain]

You can also bring out to the department what is the nature of this foreign exchange fluctuation? Is it on account of balance sheet items or profit and loss account items? This will also help to put some more force in your claim. If the amount is huge, also consider taking a CA certificate.

AI Summary

Notional foreign exchange translation gains: GST analysis distinguishes accounting reconciliation entries from consideration for taxable supplies.
Unrealised foreign exchange translation gains recognised on year-end restatement under AS-11 or Ind AS 21 are described as notional accounting adjustments, not consideration for a supply. Their disclosure in GSTR-9C serves reconciliation between financial statements and GST returns and does not itself establish taxability. The discussion distinguishes such unrealised gains from realised gains on settlement of an underlying taxable supply, which may affect that supply's value. A response should explain the accounting treatment and demonstrate that the reported amount is a non-supply reconciliation item.