The process of exporting goods and services is a complex operation that involves compliance of various laws and regulations. Amongst these regulations, one essential aspect is the currency in which the export proceeds are to be realized.
Recently, the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 has been notified w.e.f. 20.12.2023 which provides that the in case of exports to any country other than member countries of Asian Clearing Union (“ACU”) proceeds can be realised either in Indian Rupees or in any foreign currency.
The above regulation has replaced the erstwhile Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016. As per the erstwhile regulations, receipt from countries other than ACU was to be either in freely convertible currency or in Indian Rupees from account of bank situated in any country other than ACU. Thus, 2023 Regulations mark a significant relaxation in the matter of currency of realisation of export proceeds.
Though the above step is a laudable one, corresponding amendments have not been made in the Foreign Trade Policy, 2023 and the GST Law.
As per Para 2.52 of the Foreign Trade Policy, 2023 (“FTP”), all export proceeds shall be realised either in freely convertible currency or in Indian Rupees through Freely Convertible Vostro or Special Rupee Vostro account. Further, as per Section 11 of the Foreign Trade (Development & Regulation) Act, 1992 (‘FTDR Act’), the provisions of the Foreign Trade Policy are to be mandatorily followed and any violation of it may lead to a penalty up to five times the value of goods or services.
Further, even under the GST law, a service will qualify as an export of service only if the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India (Section 2(6)(e) of the IGST Act). On a plain reading of this provision, the relaxation by RBI in 2023 Regulation with respect to Indian Rupees will apply even to GST law. However, when the export proceeds are realised in any other foreign currency, the same has to be necessarily in a convertible foreign currency and cannot be in any foreign currency as permitted by RBI. If this condition is not followed, the transaction will not qualify as export and may be subjected to GST.
Thus, even though the RBI has allowed realisation of export proceeds in INR or in any foreign currency without any restriction on convertibility or the type of account, such restrictions are still present under the FTP and the GST law. Unless and until, the FTP and the GST law are amended, the benefit of relaxation will not be available to exporters.