Money changers' activity not eligible for service tax

EXPERT EYE

A moneychanger is an intermediary who buys and sells foreign exchange on commission or brokerage basis. He owns title on the goods. He first buys it from the banks and then sells them to customers on profit or purchases from others again on profit.

It is, therefore, an activity of possessing something and then selling it or again buying it. It is a trading activity, not a service to anybody. For trading one can levy value added tax and for service one can levy service tax. This concept has to be clear.

Now in a circular No.92/3/2007-ST dated 12 March, 2007, the Central Board of Excise and Customs has said money changing and foreign exchange broking are two distinct activities. Foreign exchange broking is the activity performed as an intermediary on a commission/ brokerage basis, for facilitating the clients who wish to buy or sell foreign exchange. He does not hold title to the foreign exchange.

On the other hand, moneychanger holds title to the goods, which he subsequently buys and sells. His is a trading activity whereas the broker's is a service activity.

Having stated the above distinction correctly in the circular, the Board has concluded that money changing activity is not leviable to service tax, as such activity does not fall under the category of broking service. Here is exactly the mistake.

The Board should have said money-changing activity is not a service. But by adding the words "as such activity does not fall under the category of foreign exchange broking", the impression is given that money changing activity is not a service only because it does not fall in the category of broking service. The fact is that money-changing activity is not a service at all because it is a trading activity.

The distinction between sale and service has to be clearly understood. Sale is a matter of buying and selling of goods. In the case of sale, tangible or intangible property is transferred for a consideration. In contrast a service is an activity undertaken for the benefit of somebody for a consideration that does not involve transfer of property. In every transaction the essence of it has to be seen.

For example, if you engage a painter to sketch your portrait, he would, at the end of the session, give you a painting, which has physical dimensions, and the essence of the transaction is to engage the skill and labour of the painter.

Here it is a service. However, if one goes to the studio of the painter and picks up one of the paintings and takes it by paying a consideration, it is a transaction of sale. From the above, it following principle emerges for distinguishing between sale and service.

In case of a sale, the goods exist as property of the seller before these were handed over to the buyer but in case of service, the goods emerge by way of or in the course of rendering the service.

It is also relevant to know that in the case of trade, which involves buying from somebody and selling to somebody, the relation between the person from whom he is buying and himself is a relation between a principal and a principal. It is not between principal and agent.

If it is an agent, he sells on behalf of the principal and therefore he gives a service to the principal. In that case it becomes a service and liable to service tax. In the interest of clear thinking, the Board's circular should be amended to say in so many words that moneychanger's activity is trade and not service.