Set-off of Export Receivables against Import Payables
Background:
The Reserve Bank of India (“RBI”) has announced several measures about external trade to enhance export competitiveness by decentralizing authority to authorized dealer (AD) banks and enabling them to handle cases of ‘set-off’ involving export receivables against import payables.
Earlier, approval from the RBI was mandatory for this ‘set-off’ process. RBI has been entertaining requests from exporters facilitated through their AD Category-I banks for such ‘set-off’ under specified conditions.
A lot of entities in the industry are still showing foreign receivables and payables from the same party in the financial statements instead of obtaining approval from the AD bank to set-off these amounts.
Scope:
cope:
Currently, AD banks permit exporters and importers to set off their due export payments with their outstanding import obligations to the same foreign buyer or supplier.
The RBI has been approached by AD banks representing their exporter and importer clients, seeking permission to set off dues with their international affiliated entities, either on a net or gross basis, via centralized settlement systems, whether managed internally or outsourced.
AD Category –I banks may deal with the cases of set-off of export receivables against import payables, subject to the following terms and conditions:
1. Only one AD bank shall oversee the arrangement.2. The AD bank must be confident about the legitimacy of transactions (Import/Export) and ensure no KYC/AML/CFT issues arise.
3. Set-off is permitted for transactions involving exports and imports occurring within the same calendar year.4. Import/Export Transactions must align with the prevailing Foreign Trade policy.
5. Import/Export Transactions with Asian Clearing Union countries are excluded from this arrangement.6. Export receivables against goods can’t offset import payables for services, and vice versa.
7. The AD bank needs to make sure that import payments and export receipts are still pending when they approve set-off. 8. Invoices shouldn’t be under scrutiny by investigative agencies like the Directorate of Enforcement or the Central Bureau of Investigation.
9. Bilateral settlements require mutual consent from the same overseas buyer/supplier, backed by a verifiable agreement.10. Internal settlements among affiliated companies need a legally binding agreement terms must be strictly followed. The set-off process shouldn’t facilitate tax evasion or avoidance.
11. Relevant third-party guidelines must be followed.12. The AD bank must ensure all regulatory requirements with respect to Imports and Exports are met.
13. The AD bank may request Auditor/CA certification when needed.14. Each Import/Export transaction shall be separately reported in relevant systems (FETERS/EDPMS/IDPMS).
15. The AD bank should use the ‘set-off indicator’ in E/IDPMS to settle the transaction and include information about the shipping bills, bill of entry, or invoice details being settled in the remark column.
SW Point of View:The RBI’s decision to delegate powers to AD Category-I Banks is a positive step towards enhancing the ease of doing business and streamlining the approval process. By entrusting AD Category-I Banks with greater authority, the RBI promotes a decentralized decision-making model, which is instrumental in reducing bureaucratic hurdles.
