Exports – Write-Off, Netting off Etc

Background

The Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued thereunder came in force from 1^st June 2000. Since then, over last 16 years, they have undergone several changes.

Beginning December 2015, RBI is issuing Revised Notifications in substitution of the original Notifications issued on May 3, 2000. Previously, annually on July 1 RBI was issuing Master Circulars with shelf life of one year. In another change, from January 1, 2016, most of the Master Circulars have been discontinued and substituted with Master Directions (except in case of – Foreign Investment in India, Money Transfer Service Scheme and Risk Management and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions will be updated on an ongoing basis, as and when any new Circular/Notification is issued. However, in case of any conflict between the relevant Notification and the Master Direction, the relevant Notification will prevail.

Concept and Scope

The objective of this column is to revisit certain topics on a quarterly, covering aspects or amendments in Rules or Regulations of FEMA (excluding the procedural aspects) which may have practical significance for professional brethren. The issues relating to write-off of export proceeds and some other issues connected therewith are being discussed to begin with.

Export of Goods and Services

Vide Notification No. FEMA 23(R)/2015-RB dated January 12, 2016, RBI notified Foreign Exchange Management (Export of Goods and Services) Regulations, 2015. This Notification repeals and substitutes Notification No. FEMA 23/2000-RB dated 3rd May 2000 which had notified Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

This Article discusses the following aspects in the context of exports by domestic tariff area units (i.e., units other than those located in SEZ).

1.  Reduction in invoice value.

2.  Extension of time.

3.  Write-off of unrealised export bills.

4.  Set-off of export receivables against import payables.

1.  Reduction in invoice value

     Most of the export transactions are on credit. Thus, the price negotiates also includes certain credit period. However, sometimes the overseas importer may desire to discharge purchase consideration before the due date if such pre-payment is beneficial. The importer and the exporter negotiate the consideration for such pre-payment. The consideration is generally linked to the prevailing interest rates and the period and is by way of discount for pre-payment by reduction in the invoice value.

     Presently, in case of pre-payment, FEMA permits an Indian exporter to reduce the invoice value by allowing cash discount equivalent to the interest on the unexpired period of usance. This discount is to be calculated at the rate of interest stipulated in the export contract. If such rate is not stipulated in the contract, prime rate/LIBOR of the currency of invoice is to be applied.

     Sometimes, after the goods are shipped, it may so happen that the original buyer defaults or does not pay for the goods. Having the goods shipped back to India will result in substantial expenses.

     In such case, the exporter may consider selling goods to another buyer. Therefore, FEMA permits the exporter to transfer the goods to another buyer, whether in the same country or any other country. Further, knowing the predicament of the exporter, the new buyer will attempt to negotiate a lower price. Hence, for change of buyer/consignee in such case, or selling the goods at a lower price, the exporter is not required to obtain prior permission of RBI if the following conditions are fulfilled.

i.  The reduction in value of the invoice due to such change is not more than 25% of the value of the original invoice.

ii.  The export proceeds must be realised within 9 months from the date of export to the original buyer/consignee.

     However, prior permission of RBI is required if either of the above conditions are not fulfilled. RBI may grant such permission provided:

i.   Exports do not relate to export of commodities subject to floor price stipulations;

ii.  Exporter is not on the exporters’ caution list of the Reserve Bank; and

iii.  Exporter has surrendered proportionate export incentives availed of, if any.

This category covers cases of exporters who are in the business of export for more than three years and cases of other exporters.

In case of exporters who are in the business of export for more than three years, banks may permit reduction in invoice value without any limit if: –

i.  Export outstanding (excluding outstanding of exports made to countries facing externalisation problems in cases where the buyers have made payments in local currency) do not exceed 5% of the average annual export realisation during the preceding three financial years.

ii.  Exports do not relate to export of commodities subject to floor price stipulations.

iii.  Exporter is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter has surrendered proportionate export incentives availed of, if any. 

In other cases, banks may permit reduction in invoice value if: –

i.   Reduction does not exceed 25% of the value of invoice.

ii.  Exports do not relate to export of commodities subject to floor price stipulations.

iii.  Exporter is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter has surrendered proportionate export incentives availed of, if any. 

If an exporters case is not covered in either of the above situations, prior permission of RBI needs to be obtained before reducing the value of invoice.

2.  Extension of time

Every exporter of goods / software / services is required to realise and repatriate the full value of exports (export proceeds) within nine months from the date of export. In case of exports made to the exporter’s own warehouse outside India the export proceeds must be realised within fifteen months from the date of shipment of goods.

However, many times it may not be possible to realise and repatriate the export proceeds within the stipulated time. In such cases, banks are authorised to grant extension of six months for realisation of export proceeds subject the following conditions.

i. Export transactions covered by the invoices are not under investigation by Directorate of Enforcement/Central Bureau of Investigation or other investigating agencies.

ii.  Banks are satisfied that the exporter has not been able to realise export proceeds for reasons beyond his control.

iii.  Exporter submits a declaration that the export proceeds will be realised during the extended period.

iv. The total outstanding of the exporter should not exceed US $ one million or 10% of the average export realisations during the preceding three financial years, whichever is higher. However, if the exporter has filed suits abroad against the buyer, extension can be granted by the banks irrespective of the amount involved / outstanding. 

If an exporter’s case is not covered by any of the above situations, then permission from concerned Regional Office of RBI has to be obtained for extension of time for realization and repatriation of export proceeds.

3.  Write-off of unrealised export bills

Some stakeholders appear to be under an impression that pursuant to liberalisation, permission of RBI is no longer required for writing off unrealised export proceeds. In practice, this is not the case. Unrealised export proceeds only within certain limit can be written off without obtaining prior permission from RBI, while certain amounts can be written off only after obtaining prior approval from RBI.

It is pertinent to know that there are no specific provisions / formats with respect to export of services that need to be complied with / submitted. However, the general principles governing export of goods relating to export realisation, etc. also apply to export of services.

Write-offs may be full write-offs or partial write-offs. This may be necessary due to several reasons such as, non-receipt of payment, early receipt of payment, damage to goods in transit, export of goods of a different quality, etc.

a.  Write-off due to non-receipt of payment

Sometimes, it may not be possible for an exporter to realize the amounts due against the export of goods / software / services. There may be varied reasons for this non-realisation. In such cases the exporter is forced to write-off the unrealised amount.

Depending on the amount to be written off as well as certain other conditions, the exporter can:

(a) write-off the unrealised amount without obtaining permission from his bank or from RBI; or

(b) approach the bank which handled the relevant export documents and request permission to write-off the unrealised amount; or

(c) approach the concerned Regional Office of RBI through the bank which handled the relevant export documents, for permission to write-off the unrealised amount.

To qualify for write-off, either self write-off or otherwise: –

i.   The unrealised amount must be outstanding for more than one year.

ii.  Exporter must produce satisfactory documentary evidence to prove that he has made all efforts to realise the unrealised amount.

iii.  Non-realisation must be for one of the following reasons: –

a)  The overseas buyer is insolvent and a certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds is obtained.

b)  The overseas buyer is not traceable over a reasonably long period of time.

c)  The goods exported have been auctioned or destroyed by the Port / Customs / Health authorities in the importing country.

d)  The unrealised amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization.

e)  The unrealised amount represents the undrawn balance of an export bill (not exceeding 10% of the invoice value) remaining outstanding and is unrealisable despite all efforts made by the exporter.

f)   The cost of resorting to legal action is disproportionate to the unrealised amount of the export bill.

g)  The exporter even after winning the Court case against the overseas buyer is not able to execute the Court decree due to reasons beyond his control.

h)  Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amounts have remained unrealised consequent on dishonor of the bills by the overseas buyer and there are no prospects of realisation.

It may be noted that adequate documentary evidence may be required to be provided to substantiate the write-off.

Write-off will not be permitted in the following cases: –

i.   Exports have been made to countries with externalisation problem i.e. where the overseas buyer has deposited the value of export in local currency but the amount has not been allowed to be repatriated by the central banking authorities of the country.

ii. Export Declaration Form (EDF) is under investigation by agencies like, Enforcement Directorate, Directorate of Revenue Intelligence, Central Bureau of Investigation, etc.

iii.  Outstanding bills which are subject matter of civil / criminal suit.

Limits for write-offs (by self or through bank permission)

The limits stated above are related to total export proceeds realised during the previous calendar year and are cumulatively available in a year.

Before write-off is possible, the exporter has to surrender the export incentives, if any, availed in respect of the amount to be written-off and submit documents evidencing the same to the bank.

Also, in case of self write-off, the exporter has to submit to the bank, a Chartered Accountant’s certificate, containing the following information: –

i.   Amount of export realisation in the preceding calendar year.

ii.  Amount of write-off already availed of during the current year, if any.

iii.  Details of the relevant EDF to be written off.

iv. Details of invoice no., invoice value, commodity exported, country of export.

v.  Surrender of export benefits, if any, availed in respect of the amount to be written-off. 

Further, banks are required to report the write-off of unrealised export proceeds (self-write-off or otherwise) through EDPMS to RBI.

All cases of a write-off which are not covered by the above criteria are to be referred to the concerned Regional Office of RBI for its approval.

If though the Indian exporter had not realised the export proceeds from the overseas buyer, but received the corresponding amount from either ECGC or from an Insurance company, the bank which handled the export documents can write-off the unrealised amount (without any limit) after receiving an application along with supporting documentary evidence from the exporter.

The surrender of export incentives will be as provided in the Foreign Trade Policy (FTP). However, the amount so realised / recovered from ECGC / insurance company by the Indian exporter will not be treated as export realisation in foreign exchange.

In case of write-off other than self-write-off, realisation of export proceeds will not be insisted upon under any of the Export Promotion Schemes that are covered under FTP if: –

i.  RBI / bank has permitted the write off on the basis of merits, as per extant guidelines.

ii.  The exporter produces a certificate from the Foreign Mission of India concerned, about the fact of non-recovery of export proceeds from the buyer.

In such case the Indian exporter is not required to surrender the export incentives that have been availed by him against such exports.

4.  Netting off of export receivables against import payables

At the outset, ONLY units in SEZs are permitted to net off export receivables against import payments.

It may be noted that imports and exports from group entities cannot be internally netted. Netting off can only be done in cases where import / export is from / to the same entities i.e. the two parties must be debtors and creditors of each other and not of their other group entities.

An exporter is permitted to set-off his export receivable against his import payable subject to the following: –

i.   Export / import transactions are not with ACU countries.

ii.  Set-off of export receivables against import payments are in respect of the same overseas buyer and supplier.

iii.  Consent for set-off has been obtained from the overseas buyer and seller.

iv. Import is as per the Foreign Trade Policy.

v.  Invoices / Bills of Lading / Airway Bills and Exchange Control copies of Bills of Entry for home consumption have been submitted by the importer to the bank.

vi. Payment for the import is still outstanding in the books of the importer.