Clarity Needed For India’s New Draft FEMA Trade Rules

Finance Ministry officials who are involved in reviewing the rules said several chartered accountants' firms have been among those who have pointed out a range of ambiguities in various definitions and regulations, which may trip up exporters and importers from the word go.

"Among those who have reacted to the new proposed FEMA rules, several experts have sent us detailed representations that point out certain loopholes. We will certainly look into it," said officials.

The officials feel the RBI needs to iron out the rough edges, particularly the ambiguities in many definitions. Otherwise, confusion may well prevail in the country’s trade corridors.

Monitoring System Detached From Reality Of Exports

In the balance-sheet world, the left side equals the right side. In the real world, though, it is impossible to match the declared value of the export proceeds with the bank’s balance sheet, which includes bank charges and incidental fees.

However, the RBI’s Export Data Processing and Monitoring System (EDPMS) remains blind to that reality. If the value of export proceeds falls short, even by a rupee, the EDPMS will classify that transaction as ‘open.’

"That clogs the system, eventually forcing the exporters to get involved in unnecessary paperwork and even litigation," officials who interacted with the experts said.

A possible solution for the RBI, which the experts have argued for, is to allow exporters to ‘close’ transactions by subtracting legitimate deductions (with proof). Thus, exporters can concentrate on exporting, rather than on bureaucratic red tape.

Importers Get A Raw Deal

"Another problem is that importers are not treated equally with exporters in the draft. For example, Regulation 6 makes a generous allowance for under-realisation of export proceeds. When it is the importer’s turn, there’s no such flexibility," officials said.

In the possible scenario of an importer paying less than the declared value, the only available option is to plead with the RBI for a long winded procedural approval. "This can well delay or even simply halt the process of trade," officials agree.

To ensure smooth trade and a natural justice principle, financial experts are suggesting a matching provision for imports. That would also keep the job of the compliance machinery simple.

Basic Ambiguity: What Are “Services Exports”?

Experts have also pointed out that the definition of “export of services” generates the first controversy. Does a service, provided to a Non-Resident Indian (NRI) who happens to be in the country at the time of the actual transaction, count as an export?

The words in the draft suggest that only services rendered to someone physically outside the country will be considered “export of services.” But go through the draft further, and one finds that services delivered “from within India” to a recipient “officially located outside” also qualify.

"Now, let’s create a hypothetical situation of an Indian firm helping an NRI file US tax returns or update a PAN card while the client is on a visit to India. Can these be treated as “exports of services”? The wording in the same draft, thus, creates a regulatory riddle," officials pointed out.

Other Side Of The Coin: “Services Imports”

 The definition of “import of services” is equally muddled. If a foreign consultancy firm sends experts to Indian soil to advise a local client, will it be considered an “import of services”?

Things can get further complicated. How does one consider services provided by the foreign branch of an Indian company to its own head office back home?

The current draft simply does not provide any clarification on this. "Before confusion rules supreme, these need to be clarified in the final draft," officials said.

Different Versions Of Documentation Deadlines

Documentation deadlines are also all over the place. For instance, Regulation 3(3) of the draft stipulates that exporters have 21 days to submit proof of their exports to their banks.

However, Regulation 3(2) permits consolidating multiple service exports into a single declaration, and quite surprisingly, does not specify any deadline.

"Experts who include top-notch chartered accountants firms have correctly pointed out that this can lead to a race for the consolidation of all kinds services exports among the exporters. In such a free-for-all compliance nightmare, the banks will be left guessing, as will some exporters," officials opined.

A simple solution, suggested by one of the experts who have written on the draft regulations, is: Impose the same 21-day rule for consolidated submissions, and create a level-playing field.

Confusion Around Third-Party Payments

The series of ambiguity continues in “third-party payments”. Regulation 8(1) allows exporters to receive payments from a third party if that party is named in the Export Declaration Form (EDF).

However, another provision creates supreme confusion by suggesting that payments can be received from “any party” if certain other conditions are met.

There can be two scenarios. What will happen if the third party changes after the actual transaction? Alternatively, what is going to happen if the third party is not named in the original EDF?

Both are quite possible scenarios, but the draft policy is completely silent on these. "There is a clear-cut need for the RBI to clarify, and if necessary, amend the rules to allow for such changes," pointed out officials.

Of course, the new rules have to be in compliance with safeguards like the Financial Action Task Force (FATF) norms and proper documentation, they added.

Rupee Or Foreign Currency?

Last but not least, Section 2 of the EDF stipulates that exporters have to declare values as per the invoice.

However, the draft does not mention how the declared values have to be expressed – in rupees, or foreign currency, or both?

Explicit guidance on declared values is very crucial, as in the world of trade, even a minor currency mismatch can trap a transaction inside a bureaucratic maze.

As the FEMA trade regulations are in the process of getting finalised, the central bank’s job is to clean up the field. While the global trade is in turmoil, there is no need to erect extra barriers in front of Indian exporters and importers.

"The responsibility of thrashing out all the confusion to make a final FEMA draft lies on the shoulders of the RBI and we hope it will take into account the various problems which experts have pointed out," said finance ministry officials.