Forex Regulation comprises of regulating, recording and presentation of foreign exchange fluctuation gain or losses as per the provisions of Generally Accepted Accounting Principles (GAAP)
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No any business runs in isolation, in the present globalisation scenario, business are pushed to make transactions internationally. In the case of international transactions there involve monetary exchange between two or more currencies. Exchange rate amongst currencies used to fluctuate on daily basis. The transaction occurred on a specific day may turn into money realisation on different day, thus the exchange rate may not be same on the transaction date and receipt or payment date, this cause the existence of Exchange fluctuation Risk. Forex Regulation is exchange fluctuation risk will eventually result in Exchange Gain or Exchange Loss. This exchange gain / loss need to be recorded in accounting books as per the Generally Accepted Accounting Principles (GAAP).
While preparing financial statement, the entity must ascertain the Forex Regulation in terms of Exchange fluctuation Gain / Loss as per GAAP, this also take into the amount if capitalised in any fixed asset such as Plant & Machinery, Land & Building, etc. After ascertaining exchange fluctuation gain / loss it must be segregated into two components:
- Forex Regulation on Exchange fluctuation gain / loss on Revenue account
- All transactions which are not related to acquisition, installation, disposition of any capital asset are considered as foreign exchange fluctuation gain / loss on revenue account; some examples are Trade Receivables, Trade Payables etc.
- Forex Regulation on Exchange fluctuation gain / loss on Capital account
- All transactions which are related to acquisition, installation, disposition of any capital asset are considered as foreign exchange fluctuation gain / loss on capital account; some examples are Purchase /Sale of plant & Machinery, Capital asset items etc.
All the foreign exchange fluctuation gain / loss arising on account of revenue account are allowed as expense (in case of loss) / taxed (in case of gain) in the same year in which such gain / loss arises. Unrealized gain / loss are required to be computed based upon the exchange value as on last day of the financial year and such unrealized gain / loss shall also have same treatment as of realised gain / loss in revenue account transactions.
Treatment of foreign exchange fluctuation gain / loss on account of capital nature is divided into two categories:
- Capital nature transaction covered under section 43A of the income tax act
- Capital nature transaction not covered under section 43A of the income tax act
All capital nature transaction must fulfill the condition of acquiring the asset from outside India and the asset must be for the purpose of business or profession.
All the forex regulation in terms of exchange fluctuation gain / loss arising on account of capital nature which section 43A applies are allowed as expense (in case of loss) / taxed (in case of gain) in the same year in which such gain / loss arises. Exchange gain / loss shall also be considered on the loan if taken for the purpose of acquiring of such asset, the loan must be in foreign currency and it may also be taken from any Indian Bank.
On capital nature transaction which are not covered under section 43A, exchange fluctuation gain is not taxed and exchange fluctuation loss is allowed as deduction as per ICDS (Income Computation and Disclosure Standards)
With the ever changing Law and regulatory requirements, we keep on track and advise the same on timely manner in order to ensure proper compliance. We at ReturnFilings.Com will understand the purpose of your computation for forex regulation in terms of fluctuation gain / loss and thereafter will provide you detailed analysis mentioning the law requirement and compliances need to fulfill in order to arrive at correct deduction and taxation economically and efficiently. We at ReturnFilings.Com will provide you details of regulatory filings in order to ensure proper smooth and timely compliances. We at ReturnFilings.Com are determinate to provide end to end solution; our motto is you concentrate on your business while we at ReturnFilings.Com will take care of all your compliances need for Forex regulation.