In regular business scenarios, foreign exchange variations (gain or loss) occur due to the exchange rate fluctuations. In this article, we will discuss the treatment of foreign currency fluctuations as per the GST law and the applicability of GST on such foreign exchange gain/loss:
How Does Exchange Rate Fluctuation Arise?
For some business entities, the functional currency is not the same as the presentation currency (based on the accounting standards). In such instances, the entities will record their day-to-day transactions in the functional currency and prepare their financial statements based on the presentation currency. This can lead to exchange rate fluctuations, between the exchange rates used to file monthly/quarterly GST returns, i.e., GSTR-1, GSTR-3B, and the Annual financial statements/returns.
Example:
An entity has USD as its functional currency, and the presentation currency is INR.
| Month | Turnover (USD) | Average INR Rate (Monthly) | Turnover
(INR) |
|
| 1 | 1,000 | 71 | 71,000 | Amount filed/disclosed in GST Monthly Returns |
| 2 | 1,200 | 72 | 86,400 | |
| 3 | 900 | 70 | 63,000 | |
| 4 | 1,400 | 69 | 96,600 | |
| 5 | 1,200 | 73 | 87,600 | |
| 6 | 1,500 | 74 | 111,000 | |
| 7 | 1,200 | 71 | 85,200 | |
| 8 | 1,100 | 70 | 77,000 | |
| 9 | 1,070 | 72 | 77,040 | |
| 10 | 2,350 | 70 | 164,500 | |
| 11 | 1,000 | 74 | 74,000 | |
| 12 | 1,200 | 71 | 85,200 | |
| Total | 15,120 (A) | 1,078,540 (B) |
Yearly Average Rate = INR 71 (C)
Turnover as per financial statements (A* C) INR 1,073,520 (D)
Exchange rate fluctuation (B – D) INR 5,020
How Is Foreign Exchange Rate Fluctuation Treated In GST?
Taxpayers do not have to pay GST on any gain that arises from foreign exchange rate fluctuations. Difference between the turnover reported in the audited annual financial statements and the annual return (due to foreign exchange fluctuations) should be declared as a reconciling item in the Form GSTR-9C.
As seen in the above example, the total turnover disclosed in monthly GST returns sums up to INR 1,078,540. However, the financial statements display a total turnover of INR 1,073,520. This mismatch of INR 5,020 can be presented as a reconciling item while filing the Form GSTR-9C. (Circled in red below)
GSTR-9C Part-A: Reconciliation Statement Format
Similarly, there can be instances where there are differences in the expenses and related Input Tax Credit (ITC) because of the exchange rate fluctuations. These can be presented under ‘Reasons for unreconciled difference in ITC’ in the GSTR-9C. (Refer screenshot below)
