The Foreign Exchange Management Act, 1999 (FEMA), is a comprehensive framework that governs foreign exchange and import transactions in India. It sets explicit conditions for the realization of export proceeds, aiming to ensure the stability and integrity of the country's foreign exchange reserves. Despite exporters' best efforts, circumstances may arise where export receivables remain unrealized. This guidance note examines whether such situations constitute a violation of FEMA and elucidates the conditions under which export receivables can be written off.
Limits to Write-Off Export Receivables
Under FEMA, there are defined limits for writing off export receivables, which vary depending on the status of the exporter or the authorized dealer involved. These limits are crucial for maintaining a balance between regulatory oversight and operational flexibility. The prescribed limits are as follows:
- Exporter (other than status holder exporter): 5% of the total export proceeds realized during the previous calendar year.
- Status holder exporters: 10% of the total export proceeds realized during the previous calendar year.
- Authorized dealers: 10% of the total export proceeds realized during the previous calendar year.
These limits serve to ensure that the write-off process does not significantly impact the country's foreign exchange reserves while providing some leeway to exporters facing genuine difficulties.
Conditions to Write Off Export Receivables Under FEMA
Exporters and authorized dealers can write off export receivables up to the specified limits, provided they meet certain stringent conditions. These conditions are designed to ensure that write-offs are justified and reflect genuine attempts to recover the proceeds. Key conditions include:
- Outstanding Period: The export proceeds must remain outstanding for more than one year.
- Effort Evidence: Exporters must provide documentary evidence showing that all efforts have been made to realize the dues.
- Specific Scenarios:
- Insolvency of the Overseas Buyer: A certificate from the official liquidator confirming the buyer's insolvency and the impossibility of recovering the export proceeds.
- Untraceable Buyer: The overseas buyer cannot be traced for an extended period.
- Destruction or Auction of Goods: Goods exported have been destroyed or auctioned by customs, port, or health authorities in the importing country.
- Settlement Interventions: The balance outstanding represents amounts settled through the intervention of the Foreign Chamber of Commerce, Indian Embassy, or similar organizations.
- Undrawn Balance: The unrealized amount represents the undrawn balance (not exceeding 10% of the invoice value) and remains unrecoverable despite best efforts.
- Legal Costs: The cost of legal action is disproportionate to the unrealized amount, or the court decree is unenforceable due to reasons beyond the exporter’s control.
- Dishonored Bills: Bills drawn for discrepancies between the letter of credit value and actual export value, or provisional and actual freight charges, remain dishonored with no prospects of realization.
When Exporters Cannot Write Off Export Receivables
Certain conditions strictly prohibit the write-off of export receivables under FEMA:
- Externalization Problems: Exports to countries with externalization problems, where the buyer has deposited the value in local currency but repatriation is not permitted by the central banking authorities.
- Legal Investigations: Outstanding bills under investigation by agencies such as the Enforcement Directorate, Central Bureau of Investigation (CBI), or the Directorate of Revenue Intelligence (DRI).
How to Write Off Export Receivables
Banks utilize the RBI’s Export Data Processing and Monitoring System (EDPMS) to report the write-off of unrealized export proceeds. Banks can cancel export claims upon application if the proceeds have been converted and realized into Indian currency from other sources, and the exporter is not listed in the RBI's caution list.
Role of Insurance Settlements
Exporters can request banks to set aside the relevant export bill in the EDPMS if claims are settled by Insurance Companies regulated by IRDA or ECGC. In such cases, the 10% limit does not apply, and the write-off is governed by the terms of the insurance policy. For example, if ECGC settles 80% of the export bill value, the exporter can write off the remaining 20%.
Summary
Writing off export receivables under FEMA is a nuanced process that balances regulatory compliance with the operational needs of exporters. The conditions and limits imposed by FEMA are designed to ensure that the write-off mechanism is not misused and that genuine cases of non-realization are accommodated within a structured framework.
Exporters must meticulously document their efforts to realize export proceeds and ensure compliance with FEMA's conditions to avoid penalties and maintain their operational integrity. For any assistance related to exports, government regulations, and writing off export receivables, understanding the evolving rules and regulations under FEMA is crucial. This detailed guidance aims to equip exporters with the necessary knowledge to navigate these complexities effectively.
