Understanding Exports of Goods & Services Regulations [Paypal Issue]

The Paypal issue has created quite an awareness (and the impending confusion between IEC code vs. Purpose Code) about the Exports of Goods & Services regulations and here is a guest article by Sandeep, ex-HSBC Banker to help you understand the issue better.

Exports of Goods & Services – Regulations

Exports of goods and services (including software services) are regulated by DGFT & RBI and there are regulations both on the documentation and the payments part. Some of the regulations which cover these transactions are as follows:

  • Master Circular on Export of goods and services
  • Foreign Exchange Management Act (including FEMA 14 which talks about Manner of Receipt of Payment in Foreign Currency and FEMA 23 which define the regulations related to Exports)

Some of the important points from the above regulations are as follows:

Export Documentation

  • Any exporter of goods / services out of India has to ensure the following:
  • Exporter is registered with DGFT and has a valid Importer / Exporter Code (IEC). This is mandatory for all exports out of India irrespective of the size of the transactions.
  • The buyer has to be billed within 15 days from the date of providing the service.
  • Exporter to declare the exports being made in the specified form with GR/SDF being the form for physical exports and Softex form for exports of Software in non-physical form (if the software is being exported in a CD for e.g. it will be covered under the physical exports) within 30 days from the date of invoice to the certifying authority.
  • Exporter needs to send the documents related to the export to his bank within 21 days from the date of certification of the Softex form. For software exports it is normally the Softex form and the invoice.
  • If the declaration in form GR/Softex has been made, then the Banker’s copy of the form is to be submitted along with the documents.

Good part is that there are various points under which the declaration has been exempted. One of these, which I think will be applicable to many transactions, is the exemption for goods and services less than USD 25K in value. In these cases, the transaction can be submitted to the bank without the declaration form and instead the exporter can give a letter confirming that the goods are not more than USD 25K in value. The exporter will still need to have a valid IEC and expected to realize and get the funds into India.

Receipt of Payment

  • Payment is to be received within a period of 12 months from the date of exports /invoice date
  • RBI covers only transactions being routed through the banking system so it does not specifically mention anything like a PayPal (which is not a bank) in its regulations.
  • The options normally used by exporters to get the money into India are to get the buyer to either remit directly to the exporter’s bank account in India using a wire transfer /SWIFT or get the buyer to issue a cheque /International DD.
  • Once the money comes into India and is processed by the bank, the Bank would issue an FIRC (Foreign Inward Remittance Certificate) which would mention the amount and conversion rate besides other details
  • Bank would report the transaction to RBI along with the necessary details
  • FIRC to be submitted along with the documents which would be endorsed against the export transaction and a BRC (Bank Realization Certificate) issued.
  • If the documents have been submitted prior to the receipt of the funds, then the bank can directly link the inward to the transaction and can directly issue the BRC without the FIRC being issued.

PayPal has mentioned about processing these transactions along with the code being mentioned but that would be over and above the IEC requirement. Also it is not clear under which regulation does the foreign currency account opened with PayPal is covered since normally RBI restricts the holding of Foreign Currency accounts outside India by resident Indians. This would be only clear if RBI or PayPal speaks on this.

The other online money transfer sites like Xoom, money2india, remit2india are for P2P remittances normally and hence they permit you to transfer money from your own account outside India to an either your own or other personal accounts in India and are not the ideal ones for your business transfers.

[Guest Article by Sandeep Chandalia, who was earlier with HSBC and has started up recently in banking related software.]

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