The Reserve Bank of India (RBI), as part of its progressive measures to streamline and enhance the ease of doing business, has liberalized the procedure for 'set-off' of export receivables against import payables. This landmark decision, issued vide No. RBI/2011-12/264 - AP (Dir Series) Circular No. 47 on 17th November 2011, empowers importers and exporters by simplifying and facilitating trade-related transactions.
As an Export Import Guru, I will take you through the implications and conditions of this circular, and how you, as an exporter or importer, can best leverage it.
What does the Liberalized Set-off Procedure mean?
In simple terms, 'set-off' implies the offsetting of export receivables against import payables. It essentially allows businesses to balance what they owe (import payables) with what they are owed (export receivables). This system streamlines business operations, mitigates exchange rate risks, and ensures a healthier cash flow.
The liberalization of this procedure has delegated power to AD - Category - I banks to handle cases of set-off of export receivables against import payables. The move was a response to exporters' requests and serves to boost the trade landscape by simplifying processes and facilitating smoother transactions.
How to Comply with the RBI's Liberalization Conditions
The RBI's liberalization comes with specific conditions which must be satisfied to qualify for the set-off procedure. Let’s explore these conditions:
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Alignment with the Foreign Trade Policy: The import should be in line with the existing Foreign Trade Policy. The policy dictates the terms and conditions for imports, and adhering to it is critical for a smooth set-off procedure.
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Submission of Necessary Documents: The importer should submit the Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills of Entry for home consumption to the Authorized Dealer (AD) bank.
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Outstanding Payment for Import: The set-off is only permissible if the payment for the import is still outstanding in the importer’s books.
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Separate Reporting of Transactions: Both the sale and purchase transactions should be reported separately in 'R' Returns. This ensures clarity and transparency in record-keeping.
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Adjustment/Receipt of Export Proceeds: The relative GR forms will be released by the AD bank only after the entire export proceeds are adjusted or received. This ensures the completion of the export transaction before the set-off process.
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Consent for Set-off from Overseas Buyer/Supplier: The set-off should pertain to the same overseas buyer and supplier, and their consent for set-off should be obtained. This fosters trust and mutual agreement in the transaction.
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Exclusion of ACU Countries: The export or import transactions with ACU (Asian Clearing Union) countries should be kept outside the arrangement.
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Submission of Documents to AD Bank: All relevant documents should be submitted to the concerned AD bank, which should comply with all the regulatory requirements relating to the transactions. This is essential for ensuring transparency and adherence to the laws.
The Benefits of the Liberalized Set-off Procedure
The liberalized set-off procedure opens up a host of advantages for exporters and importers, including:
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Cash Flow Management: By offsetting receivables against payables, businesses can better manage their cash flows and maintain a robust financial position.
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Risk Mitigation: The set-off procedure aids in mitigating exchange rate risk, a significant concern for businesses dealing in international trade.
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Operational Efficiency: With a streamlined process, businesses can save time and resources, which can be channeled towards growth-oriented initiatives.
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Ease of Business: The move adds to the ease of doing business, reducing the need for businesses to separately track and manage their import payables and export receivables.
The RBI's Circular No. 47, dated 17.11.2011, is indeed a significant move that aligns with the country's vision to simplify and foster trade procedures. It is a testament to the fact that prudent financial policies coupled with a liberal approach can pave the way for a stronger, more vibrant business landscape. The key for importers and exporters is to understand, adhere to, and effectively leverage these policies for their business growth.
As you navigate the path of international trade, it's important to stay updated and well-versed with these policy changes and measures. Remember, knowledge is power, and in the world of import and export, this couldn't be more true.
Continuing from the earlier discussion, the Reserve Bank of India (RBI) later received requests from Authorized Dealer (AD) Banks, on behalf of their Importer/Exporter constituents, for permission to set off with their overseas group or associate companies either on a net or gross basis. These requests aimed at facilitating a centralized settlement arrangement, whether managed in-house or outsourced.
In response, the RBI considered these requests and empowered AD Banks to consider such set-off requests. The revised guidelines, superseding the instructions contained in Circular No 47 dated November 17, 2011, were issued vide Para No. 3 of Circular No. 8 dated 04.12.2020.
These revised guidelines have brought more clarity and flexibility to the 'set-off' mechanism. Here, I will help you comprehend these guidelines and how they could affect your international trade activities.
Revised Guidelines for Set-Off Procedure
The new guidelines allow for the set-off of outstanding export receivables against outstanding import payables, subject to the following conditions:
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Single AD Bank Supervision: The arrangement should be operationalized and supervised through or by only one AD bank.
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KYC/AML/CFT Compliance: The AD bank should be satisfied with the bona fides of the transactions and should ensure there are no concerns related to Know Your Customer (KYC), Anti Money Laundering (AML), or Combating the Financing of Terrorism (CFT).
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Clearance from Investigation: The invoices under the transaction should not be under investigation by the Directorate of Enforcement, Central Bureau of Investigation, or any other investigative agency.
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Alignment with the Foreign Trade Policy: Import and export of goods/services should be undertaken as per the extant Foreign Trade policy.
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Exclusion of ACU Countries: Transactions with Asian Clearing Union (ACU) countries should be kept outside the arrangement.
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Separation of Goods and Services Transactions: Set-off of export receivables against goods should not be allowed against import payables for services, and vice versa.
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Outstanding Balances Requirement: AD bank should ensure that import payables/export receivables are outstanding at the time of allowing set-off. The set-off should be allowed between the export and import legs occurring during the same calendar year.
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Bilateral Settlement Conditions: In case of bilateral settlement, the set-off should be with the same overseas buyer/supplier and supported by a verifiable agreement or mutual consent.
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Group/Associates Companies Agreement: If the settlement is within the group or associate companies, the arrangement should be backed by a written, legally enforceable agreement or contract. The AD bank should ensure strict adherence to the agreement terms.
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No Tax Evasion/Avoidance: Set-off should not result in tax evasion or avoidance by any of the entities involved in such an arrangement.
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Third-Party Guidelines Compliance: The concerned entities should adhere to third-party guidelines, wherever applicable.
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Regulatory Compliance: The AD bank should ensure compliance with all the regulatory requirements related to the transactions.
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Auditor/CA Certificate: The AD bank may seek an Auditor's or Chartered Accountant's certificate wherever deemed necessary.
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Separate Reporting of Transactions: Each export and import transaction should be reported separately (on a gross basis) in FETERS/EDPMS/IDPMS, as applicable.
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Settlement Detailing: The AD bank should settle the transaction in E/IDPMS by using the 'set-off indicator' and mentioning the details of shipping bills, bill of entry, and invoice details being settled in the remark column, including the details of involved entities.
These guidelines, while seemingly extensive, add another layer of transparency and due diligence to the set-off process. They ensure that the process is conducted with the highest level of compliance and oversight. This not only protects the interests of the importers and exporters but also contributes to the integrity of India's foreign trade sector.
By adhering to these guidelines, businesses can efficiently manage their export receivables and import payables, thereby enabling better financial management and operational efficiency. Understanding these guidelines is crucial to fully utilize the opportunities presented by these policy revisions and to continue thriving in the world of import and export.
With this note, I would like to end this comprehensive guide on the set-off of export receivables against import payables. Do remember to stay updated on RBI circulars and guidelines, as they can drastically impact your import-export operations. Keep trading and keep growing!
The recently revised Foreign Trade Policy (FTP), 2023, and Foreign Trade Policy Procedure, 2023, effective from April 1, 2023, have introduced some critical changes to the rules governing the offsetting of export proceeds. In this section, I'll focus on these updates and their implications for exporters.
Offsetting of Export Proceeds as per the New FTP
According to Para 2.74 of FTP Procedure, 2023, the offsetting of export proceeds is subject to the specific approval of the RBI. This means that any payables or equity investment made by an Authorization holder under any export promotion scheme can be used to offset receipts of his export proceeds. But for this, the RBI's specific permission is required.
This offsetting will be considered equivalent to the realization of export proceeds. The exporter will also need to submit two additional documents - Appendix-2L in lieu of Bank Realization Certificate and the specific permission from the RBI.
This change signifies that the RBI now requires its specific approval for offsetting export proceeds, which adds an additional layer of regulatory oversight to the process.
The Introduction of Appendix-2L
FTP Procedure, 2023 introduces a new form, Appendix-2L, replacing the Bank Realization Report. This form is divided into four parts:
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Exporter's Details: This section requires basic information about the exporter, such as the name, address, Import Export Code Number, and email of the applicant.
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Offsetting Mode: The applicant needs to specify the specific mode of offsetting. This could be import payables, equity investment, loan repayment, dividend repayment, or others (details must be provided).
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Export Details: This section asks for various details related to the export. These include the invoice number and date, shipping bill number and date, the description of goods, the scheme under which offsetting is undertaken, the amount offset (in free foreign exchange), and the date of offsetting.
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Declaration/Undertakings: In this part, the applicant is required to give several declarations and undertakings. These include certifying the truth of the information provided, compliance with relevant legal and policy provisions, authorization to verify and sign the declaration, the non-adverse status of the company's officials, and certification of RBI's permission for the offsetting of export proceeds.
It's essential for businesses to keep abreast of these regulatory changes and adapt their practices accordingly. Understanding the FTP and the revised procedures can make a significant difference in the successful management of your export-import operations.
The Role of Professionals in Offsetting of Export Proceeds
In line with the new requirements, a certificate from a Chartered Accountant or Cost Accountant must accompany the offsetting application. This certificate replaces the Bank Certificate of Exports and Realization. The introduction of this professional certification adds another level of verification to ensure that the offsetting is conducted in strict adherence to the rules and regulations.
The Chartered Accountant/Cost Accountant is required to examine and verify several crucial documents submitted by the applicant, including:
- Export order/Contract
- Shipping bills
- Bill of Lading (and/or Airways Bills/Receipts)
- Customs/Bank attested Invoices
The role of the professional is to ensure that the offsetting has been executed with the explicit consent of the RBI and is in accordance with the current rules and regulations. The professional must certify that the furnished information is accurate and complete, not misleading, and that no relevant information has been withheld.
It's also important to note that if the concerned professional or any of his/her partners/directors is a partner, director, or an employee of the applicant entity or its associated concerns, they must disclose this fact. Any false or incorrect statement made in the certificate can lead to penal actions or other legal consequences.
Along with the certificate, the following documents must be attached:
- Specific permission from the RBI
- Letter from the parent company/buyer, etc., indicating the proposal for offsetting of export proceeds
This involvement of professional certification in the offsetting process underscores the importance of due diligence and adherence to regulations in the export-import business. It is designed to ensure greater compliance and accountability, thereby protecting the interests of all stakeholders.
Download PDF: https://content.dgft.gov.in/Website/2L.pdf
As we conclude our in-depth exploration of the new regulations surrounding the offsetting of export proceeds, it's crucial to consider some practical questions related to the process:
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Understanding the Procedure: Do you fully understand the process and the conditions set by the Reserve Bank of India and the Foreign Trade Policy Procedure, 2023, for offsetting export receivables against import payables? Having a thorough understanding of the requirements will help you stay compliant.
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Access to Required Documents: Do you have all the necessary documents for offsetting? These include specific permission from RBI, shipping bills, invoices, and the new Appendix-2L form.
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Professional Assistance: Do you have a trusted Chartered Accountant/Cost Accountant to verify and certify the transaction? Their role is crucial in verifying the transaction and ensuring that all relevant documents are provided.
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Overseas Associations: In cases of bilateral settlement, do you have a verifiable agreement or mutual consent with the same overseas buyer/supplier? And in the case of settlements within group/associate companies, do you have a legally enforceable agreement in place?
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Regulatory Compliance: Are you fully aware of the current rules and regulations, especially with respect to avoiding tax evasion and adhering to the third-party guidelines?
Addressing these questions can assist you in ensuring a smooth and compliant process when dealing with offsetting export receivables against import payables.
Now, let's consider how the services offered by Barai Overseas Export Import Consultation can benefit you:
Customized Consultation: Every business is unique, with different needs, capabilities, and challenges. Barai Overseas Export Import Consultation recognizes this and offers personalized consultations tailored to your specific business needs.
Regulatory Compliance Assistance: Navigating through the web of regulations can be challenging. Barai Overseas helps you understand and comply with all relevant regulations, ensuring a hassle-free business experience.
Expertise and Experience: With years of experience in the field, the team at Barai Overseas has deep knowledge and understanding of the export-import domain. They can provide you with valuable insights and practical advice to help you navigate complex situations.
Professional Network: Working with Barai Overseas gives you access to their extensive professional network, including trusted Chartered Accountants and Cost Accountants. These professionals can help verify and certify your transactions, ensuring compliance.
End-to-End Support: From understanding regulations to preparing necessary documentation, Barai Overseas provides comprehensive support. This end-to-end support can save you valuable time and resources, allowing you to focus on growing your business.
Whether you're new to the export-import industry or a seasoned veteran, having a knowledgeable and experienced partner like Barai Overseas Export Import Consultation can make the journey a lot smoother. Stay ahead of the curve and enjoy a prosperous experience with the guidance of the Export Import Guru.