Draft - Export Import Regulations and Directions Under the Lens

The regulatory framework for the export and import of goods and services has been liberalised and rationalised by the Reserve Bank of India (“RBI”) from time to time over the years to align the policies with the evolving global trade. Transactions pertaining to the import and export of goods and services, under the FEMA (defined hereinafter), are currently governed by the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015 (“Regulations”) and the Master Direction-Export of Goods and Services and Master Direction- Import of Goods and Services (collectively referred to as “Master Directions”).

In order to promote the ease of doing business for small exporters and importers and to empower the Authorised Dealer (“AD”) banks to provide efficient services to the importers and exporters, the RBI has, in the exercise of the powers conferred to it under the provisions of FEMA, formulated the draft Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024 (“Draft Regulations”) and draft Directions to Authorised Dealers on Export and Import of Goods and Services (“Draft Directions”) and published the same vide Press Release: 2024-2025/615, which have been made available for public response, comments and feedback until September 01, 2024 and upon being notified, shall supersede the Regulations and the Master Directions. The Draft Regulations and Draft Directions demonstrate a commitment to drive change and rationalise the guidelines for imports and exports of goods and services while laying the groundwork for dynamic cross-border trade transactions. In this article, we delve into the pivotal reforms introduced by the RBI, through the Draft Regulations and Draft Directions and understand the potential impact of the changes on the stakeholders

Applicable Laws

1. Foreign Exchange Management Act, 1999 (“FEMA”);
2. Foreign Exchange Management (Current Account Transaction) Rules, 2000;
3. Foreign Exchange Management (Export of Goods and Services) Regulations, 2015;
4. Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023;
5. Foreign Exchange Management (Borrowing and Lending) Rules, 2000;
6. Master Direction- Export of Goods and Services (RBI/FED/2015-16/11; FED Master Direction No. 16/2015-16);
7. Master Direction- Import of Goods and Services (RBI/FED/2016-17/12; FED Master Direction No. 17/2016-17); and
8. Merchanting Trade Guidelines, 2020 (“Guidelines”).

Key Proposed Changes

The major changes proposed by the RBI under the Draft Regulations and Draft Directions can be observed under the following categories:

1.          Reporting of Exports

As per the current Regulations, exporters are required to make a declaration in Export Declaration Form (“EDF”) for all exports through custom manual ports, including exports of software in physical form (i.e. magnetic tapes, discs and paper media), while exports of software through the non-physical form are required to be declared in the form ‘SOFTEX’. Further, all exports taking place through ‘Electronic Data Interchange’ ports are exempted from reporting requirements under the current Regulations.

The Draft Regulations propose to streamline the reporting process by consolidating multiple forms into a single form and further require every exporter to make a declaration in EDF for all export transactions regardless of the nature of the port, thereby simplifying compliance. The timeline for making the declaration however remains unchanged as 21 (twenty-one) days from the date of export shipment for goods or the date of invoice for exported services.

2.          Advance Payments

Under the existing Regulations, exporters are allowed to receive advance payments for the export of goods from the buyer or a third party named in the EDF, given that such goods are exported within 1 (one) year from receipt of the advance payments or alternatively as per the terms of the export agreement which duly captures the understanding of shipment of goods.

The Draft Regulations proposed by the RBI provide greater flexibility in relation to the timelines towards the obligation to export the goods and services against the advance payments received as the same may be governed as per the terms and conditions of the export agreement.

Further, in the event an exporter is unable to meet the export obligations as per the terms and conditions of the agreement, they may be allowed to extend the timelines, at the AD bank’s discretion and/or as per the internal policies formulated by the AD bank. Furthermore, repatriation of advance payments is allowed under the current Regulations only after obtaining an approval from the RBI, whereas the Draft Regulations permit the exporters to refund the advance payments without seeking any such approval.

3.          Timeline for Payments

As per the existing Regulations, the full value of the exported goods, software and services must be realised/repatriated to India within 9 (nine) months from the date of export. This provision remains unchanged in the proposed Draft Regulations, however, the RBI has, in the Draft Regulations, provided clarity towards the calculation of the period of 9 (months) in case of export of services, which shall be calculated from the date of invoice. 

Further, the current Regulations require import payments to be made within 6 (six) months from the date of shipment, which has been revised in the Draft Directions to allow the importers to exercise their discretion and decide the timeline for payment of imports as per the period specified in the agreement between the importer and overseas seller.

4.          AD Banks

The Draft Regulations entail a substantial delegation of powers from the RBI to the AD banks. The AD banks shall assume the responsibility for granting various approvals, which are currently granted by the RBI, including approvals for the extension of timelines, set-off, reduction in realisable value of exports, advance payments and caution listing.

In accordance with the provisions of the Draft Directions and Draft Regulations and the operational flexibility and discretionary powers granted thereunder, the AD banks shall be required to formulate internal policies, duly approved/ratified by their board, within 6 (six) months from the date of notification of the Draft Directions, and ensure compliance of such policies with the provisions of FEMA, Foreign Trade Policy (“FTP”) and other rules/regulations for handling transactions related to export and import of goods and services.

5.          Set-off

As per the existing provisions, set-off of export receivables with import payables in the same calendar year is allowed between the same counterparties (except in the case of group companies), provided that the parties have consented to such set off in writing and/or in the agreement.

Under the proposed Draft Regulations and Draft Directions, the provisions of set-off have been liberalised whereby the AD banks, if satisfied that the grounds for such requests are legitimate and justifiable, shall be permitted to allow set off of export receivables against import payables regardless of the year of the transaction. However, the Draft Regulations and Directions remain silent on the exemptions granted to overseas group companies for the set-off. Set-off of export receivables for goods and import payables for services and vice versa is prohibited as per the current provisions and shall remain prohibited as per the Draft Regulations unless revised before being notified.

6.          Reduction in the Export Value

As per the existing provisions, the AD banks may allow a reduction in the value of exports by way of cash discount, or due to any other reasons subject to a cap of 25% (twenty-five percent) or beyond 25% (twenty-five percent) in certain circumstances, subject to the existing provisions. The Draft Regulations and Draft Directions, provide flexibility to the exporters, subject to the ratification by the board of the AD bank, and the AD banks by permitting the AD banks to allow a 100% (one hundred percent) reduction in the export value.

Further, under the existing Regulations, self-write-off is allowed subject to a limit of 5% (five percent) or 10% (ten percent) for write-off by the AD banks or special status holders, in case of insolvency of buyer, disproportionate legal cost and destruction of goods. The Draft Regulations and Draft Directions do not provide for any self-write-off provisions.

7.      Caution Listing

The powers of caution listing, currently being exercised by the RBI will be delegated to the AD banks in order to simplify and streamline the caution-listing and de-listing procedure. As per the existing provisions, exporters are caution listed and de-caution listed by the RBI, as per the recommendations from the AD banks based on the exporters’ track record with the AD bank and investigative agencies.

However, as per the proposed Draft Regulations and Draft Directions, an exporter may be caution listed by the AD bank if an export amount is outstanding in the Export Data Processing and Monitoring System (“EDPMS”) and the full value of exports is not realised within a period of more than 2 (two) years from the due date of realisation (including the extensions granted by the AD bank, if any), subject to the exporter being duly informed before being caution listed in the EDPMS and given an opportunity of being heard. Further, the AD banks shall have the power to de-caution list the exporter upon realisation of export proceeds (including by way of reduction in realisable value or set-off) and thereafter update the status of such exporter in the EDPMS.

8.  Merchanting Trade Transactions (“MTT”)

MTTs, currently governed by the Guidelines, are proposed to be replaced with the simplified provisions of the Draft Directions. As per the Guidelines, the transactions must be profitable, routed through the same AD bank and completed within 9 (nine) months, however, these obligations have been done away with in the Draft Directions to simplify the framework governing MTTs.

Under the Draft Directions, payments for goods shall be allowed if the period between the outward remittance and inward remittance does not exceed 6 (six) months, which is currently 4 (four) months as per the Guidelines. Further, the write-off provisions for MTTs which are currently governed by the specific conditions prescribed in the Guidelines are proposed to be replaced with the general write-off provisions under the Draft Regulations and Draft Directions. 

9.          Project Exports

 As per the provisions of the Draft Regulations and Draft Directions, exporters shall be required to obtain approvals from the AD bank before the execution of contracts for all turnkey and civil construction, by submitting a proposal for such prior approval. Further, the AD banks shall constantly monitor the progress of work in such projects, till the completion of the projects, in order to facilitate the corresponding payments.

Furthermore, AD banks shall also be required to verify the export contracts to ensure their consistency with FEMA and the applicable rules, regulations and directions thereunder. The inter-project transfer of funds has been omitted in the Draft Directions and shall require clarification prior to the notification of Draft Regulation and Draft Directions.

Concluding Note:

The changes proposed through the Draft Regulations and Draft Directions, if notified, shall be welcomed by the stakeholders as they represent the government’s approach to reducing bureaucratic hurdles for exporters and importers and in streamlining the processes by delegation of powers from the RBI to the AD banks. The Stakeholders may require further clarity from the RBI with respect to certain relaxations which have been provided under the existing Regulations but omitted in the Draft Regulations and Draft Directions including but not limited to third-party payments, transfer pricing adjustments, set offs for group companies and policy formulation by the AD banks.

The changes proposed through the Draft Regulations and Draft Directions may act as a catalyst for attracting export transactions and addressing pressing issues at various levels of import-export transactions. The AD banks, working at the ground level with importers and exporters shall be able to exercise their discretion and regulate the transactions better and accelerate the approval processes, which shall further benefit the importers and exporters.