If you are an Indian exporter and you have been flooded with notices from your banks on outstanding Inward Remittance Memorandums (IRMs) against exports that you have made some time back, you are not alone. Most authorised dealer banks have been asked by the Reserve Bank of India to monitor outstanding IRMs and clear them off, failing which exporters could even be put on the Exporters’ Caution List. Let’s find out what this means and also what steps we can take suo moto to avoid any unnecessary repercussions.
If an exporter knows fully well that the receipts against exports are going to be delayed, then read on.
There are times when exporters sometimes face situations where their efforts to realize export proceeds don’t materialize. Under the Foreign Exchange Management Act (FEMA), there is a structured process to deal with such instances, allowing exporters to write off unrealized export proceeds under specific conditions. Below paragraphs outline the process, conditions, and steps that exporters must follow to write off exports while staying compliant with FEMA regulations.
When Is Writing off Exports Necessary?
Writing off exports becomes necessary when exporters, after making genuine efforts, are unable to realize payment from foreign buyers. This could be due to a variety of reasons such as buyer insolvency, disputes, political risks, or other unforeseen circumstances. FEMA allows exporters to write off these receivables, provided the exporter complies with the conditions and follows the prescribed procedure.
Time Frame for Realizing Export Proceeds
According to FEMA, exporters must realize export proceeds within a period of nine months from the date of export. If the proceeds remain unrealized after this period, exporters have two options:
Seek an extension from their Authorized Dealer (AD) bank or If recovery appears impossible, proceed with writing off the amount, provided all FEMA regulations are adhered to.
Self Write-off Limits for Exporters
Exporters are permitted to write off unrealized export proceeds on their own without requiring prior approval from the Reserve Bank of India (RBI), subject to specific limits:
For Status Holders (e.g., Star Export Houses): Up to 10% of total export proceeds during the financial year.
For Other Exporters: Up to 5% of total export proceeds during the financial year. If the amount to be written off exceeds these limits, exporters must approach their AD bank for approval.
Conditions for Writing off Exports
Exporters can proceed with a write-off of export receivables if they meet any of the following conditions:
- Insolvency or Bankruptcy: The foreign buyer has been declared insolvent or has ceased operations.
- Litigation: There is a protracted litigation case between the exporter and the buyer, preventing realization of proceeds.
- Political Risk: Payment cannot be realized due to political turmoil or sanctions in the buyer’s country.
- Natural Calamities: Goods were destroyed or damaged during transit, making recovery impossible.
- Other Genuine Reasons: Where efforts have been made to recover the payment, but the exporter is still unable to realize proceeds.
Documentation Required for Writing off Exports
To justify the write-off of export proceeds, exporters must provide certain documentation to demonstrate that all efforts have been made to recover the dues. These documents include:
- Bank Realization Certificate (BRC) or proof of non-realization of export bills.
- Correspondence with the foreign buyer, showing evidence of attempts to recover payment.
- Legal or Insolvency Declaration, proving the buyer’s insolvency or court proceedings.
- Insurance Claims (if applicable), in case the shipment was insured and claims were filed.
- Letter of Undertaking, explaining the circumstances and reasons for the non-recovery of export proceeds.
Approval Process for Writing off Exports
- Self Write-Off: If the amount being written off is within the prescribed limits, exporters can proceed without seeking approval from RBI. However, they must document the write-off in their export records and report it to their AD bank.
- Write-Off Through AD Bank: For amounts exceeding the self-write-off limits, exporters must submit a formal application along with supporting documents to their AD bank. The AD bank will review the justification and documentation before approving the write-off.
- RBI Approval: In certain cases where the amount is substantial or there are complexities, the AD bank may refer the case to the RBI for final approval.
Reporting and Compliance Obligations After Write-off
Once the write-off is approved, exporters need to follow certain compliance steps:
- Adjustment of Export Turnover: The exporter must adjust the export turnover by deducting the written-off amount and record it in their financial statements.
- Update Export Declaration Form (EDF): The Export Declaration Form (EDF) submitted to customs authorities must be updated to reflect the write-off.
- Customs and Financial Reporting: The exporter must ensure that their shipping bills and related customs documentation are updated, and any tax implications are handled correctly.
Key Considerations
Exporters should note the following critical points when writing off exports:
- Clubbing Write-Offs: Exporters are allowed to consolidate write-offs across multiple transactions within the financial year, provided they stay within the permissible limits.
- Interest and Penalties: Failure to comply with FEMA regulations during the export write-off process can lead to penalties, including interest charges on delayed remittance reporting.
- Timely Filing: It is essential to ensure that the write-off and all associated documentation are filed within the required timelines to avoid regulatory issues.
Managing Export Write-Offs Efficiently
Writing off export receivables under FEMA is a necessary step for exporters facing genuine challenges in realizing payments. By following the correct procedures and providing the required documentation, exporters can manage their export write-offs efficiently while remaining compliant with FEMA regulations.
If you’re an exporter dealing with unrealized export proceeds, it’s advisable to consult with financial and legal experts to ensure you handle the write-off process correctly and avoid any penalties or compliance issues. The fallout may be as huge as being put on the exporters caution list, which effectively means that you cannot make exports without receiving entire payments in advance.
Our team of professionals is here to guide you through every step of the process.
