Advance Payment for Import of Goods and Services under FEMA

Varun Hariharan

19 Nov, 2020

The process of importing or import is defined as bringing goods and services into the territory of India. The importing process can be done by –air, sea, and land. The meaning of import has been defined under the Foreign Exchange Management Act 1999, as bringing into India any form of goods and services. This is under section (P) of the Foreign Exchange Management Act. Import and export process is regulated under section 5 of the Foreign Exchange Management Act (1999). The law related to FEMA, along with the notification on Foreign Exchange Management (Current Account Transactions) Rules 2000, which was brought into force in May 2000, also governs the law related to import and export of goods into and outside India.

These regulations are brought out by the Government of India along with the RBI. The RBI amends these regulations from time to time according to the changing circumstances. However, the RBI is not the only nodal agency governing the law related to FEMA. Such law and rules pertaining to FEMA are made by the RBI and circulated to the Authorised Dealers. Authorized Dealers (AD), also known as Authorised Persons (AP) are banks and financial institutions dealing with foreign exchange transactions. Under section 11 of the Foreign Exchange Management Act, 1999, specific rules made by the RBI have to be circulated to the authorized dealers. Authorized dealers regularly deal with the transactions related to export and import. Therefore, an authorized dealer must have information on the changes in law related to import.

Apart from the law laid down by the RBI on Authorised Dealers, several directions are also implemented, which have to be followed by the Authorised dealers. These laws and directions explain the processes and procedures on the working of foreign business in India. Apart from this, other procedures would also be explained in the directions. This would include the method for imports, payment systems which are used by authorized banks, Advance payment for import of goods, advance payment for import of services, and other aspects.

Authorized dealers have to ensure that such regulations are implemented while dealing with import transactions. For Example- when an authorized dealer has to receive an advance payment for import of goods and services, the framework related to import and processing of the transactions has to be understood in advance so that import transactions run smoothly.

RBI has also provided a Master Direction that has specific instructions related to the import of goods and services in India. Apart from Advance payment for the import of goods, this direction provides rules related to the importing of goods into India. Reporting such transactions also has to be according to the Master Direction No. 18 Dated January 01, 2016.

The RBI provides specific circulars regarding the changes in the framework relating to the procedure of imports in India. These circulars have to be followed and implemented by authorized banks dealing in transactions relating to imports in India.

Import Trade Compliance- Advance Payment for Import of Goods

Apart from the above institutions that govern foreign exchange transactions relating to import business in India, trading of goods and services between India and Outside India is governed by the Director-General of Foreign Trade (DGFT). The DGFT is one of the primary institutions dealing with foreign trade. The DGFT comes under the Ministry of Commerce (MOC), Department of Commerce (DOC), and the Government of India (GOI).  The Foreign Trade Policy (FTP) has been brought out by the DGFT and different institutions. This policy is amended every five years. The current administration in force is the FTP 2015-2020. Authorized banks also have to conduct import and export transactions in conformity with the foreign trade policy in force. The FTP also governs advance payment for the import of goods and services into India.

License for Import- Advance Payment for Import of Goods

A license is required by an importer to conduct import transactions within a country. There are certain goods which come under the category of negative list for which prior permission is required concerning the import of such goods. If the goods listed in the import do not come under the negative list of goods, then the concerned authorized bank can open a letter of credit the importer. This is also required for exchange control purposes. Before making an advance payment for the import of goods, the importer has to obtain a license.  Once the importer secures the license, an advance payment for the import of goods and services would be possible.

Payment Processing Systems- Advance Payment for Import of Goods

Payments from importers have to be processed through the authorized dealer. Outward remittances would be conducted for importing of goods into the country. Authorized dealers use the online banking system for managing payments related to the import and export of goods. This system is known as Import Data Processing and Monitoring System (IDPMS). This system was brought out by RBI to reduce the transaction time for import processing transactions. An authorized bank uses this system to monitor all import transactions. Therefore transactions related to advance payment for import of goods can be monitored through this system.

Settlement

Payments for import transactions should typically happen within six months from the date of shipment. This would not apply to advance payment for the import of goods. The above conditions would not be applicable where banks and parties have provided a guarantee of performance.

Authorized dealers are allowed to extend the period of settlement if there are circumstances beyond the control of the parties. These circumstances include financial inability, disputes, and other causes. However, authorized dealers can only extend the period of settlement to 3 years. Under no condition will this period be increased for settlement of dues of the parties.

Guidelines issued by the RBI on Advance Payment for Import

The RBI, in their Master Direction, has issued various guidelines related to advance payment for the import of goods and services to India. These guidelines have to be adhered to by authorized banks dealing with advance payment for the import of goods and services. The following are the criterion which requires to be developed for advance payment for import. Remittance is understood as a transaction involving money. Remittance normally happens through electronic channels.

1. Advance remittance/ payment for import of goods into India

Importers are permitted to carry out advance payment for the import of goods into India. However, importers have to follow the conditions laid down by the authorized banks related to advanced payment. There is no limit on the amount of advance payment of the transaction.  Imports of goods are allowed by the Authorised Dealer subject to the following conditions:

• If the amount of payment exceeds USD 200000 or its equivalent in another foreign currency, then an unconditional, standby letter of credit or guarantee is required from an international bank. The international bank has to be reputed and situated outside India. Apart from this, a guarantee is required from the Authorised bank in India. This guarantee would act as a counter-guarantee against the guarantee issued by the international bank.
• Where the importer (except a Public Sector Undertaking/ bank or State Government or an institution under the government of India) cannot obtain the bank guarantee from the suppliers overseas, then the authorized dealer would look at the import history of the importer. Apart from this, the track record and the transactions of the importer would be taken into consideration. If all the transactions conducted by the importer are bonafide, then the requirement of the bank guarantee or the letter of credit will not be required by the Authorised Dealer. This would be for advance remittances up to USD 5 million. Banks can frame their policies regarding the requirement of the amount of advance remittance.
• Other institutions, such as public sector undertakings or departments under the government of India or state government departments, which cannot obtain a guarantee from an international bank for the advance payment for import of goods and services, would have to obtain a specific form of waiver. This waiver is for the bank guarantee. The waiver can be obtained from the Ministry of Finance, Government of India. This waiver would only be required from the above institutions in case the advance payment for the import of goods exceeds USD 100000.

Authorised Dealers must monitor the payments made by importers towards the remittances. The Authorised Dealer is also required to create an Outward Remittance Message (ORM) for all outward remittance transactions made by the importer. These transactions have to be under the IDPMS.

2) Advance payment for import of diamonds/ cut stones and precious stones

Authorized banks can make decisions on the import of diamonds. Apart from this, authorized dealers can provide a list of foreign mining companies to importers for making advance payments.  This list would only be for specific importers and would not include government institutions/ government organizations and state-owned institutions. Advance payment for import of rough diamonds in such instances can be made without any bank guarantee/letter of credit or some standby letter.

However, the following conditions must be adhered by the authorized bank:

• The foreign mining company must be certified and accredited with the Gem and Jewellery Export Promotion Council (GJEPC).
• The importer must have a good record of dealing with diamond transactions and should be a recognized processor of rough diamonds.
• The authorized dealer should take diligence in conducting the transaction. The bank has to exercise commercial prudence in the transaction. Apart from this, the bank must consider the bonafide of the transaction.
• Advance payment for the import of diamonds must be according to the stipulations of the contract. Payment has to be made directly into the account of the company concerned. The transaction should not go through a series of accounts but must go to the final beneficiary.
• The advance payment for the import of diamonds must be according to the Kimberly Certification. The remittance must be allowed for the import of the diamonds. There must be no conflict when it comes to payment for diamonds.
• The Authorised Dealer must carry out Know Your Client (KYC) on the transaction. Apart from this, Due diligence must be carried out on all parties of the transaction.
• Authorized dealers should ensure to check with the concerned authorities regarding the documents related to import/ bill of lading or documents evidencing such import. These documents which describe the diamonds imported must be according to the specifications.
• When the importer is a Government Institution or a Public Sector Bank or State Government Institution, advance payment for import of diamonds would be allowed subject to the above conditions. Apart from this, a waiver and a bank guarantee are required from the Ministry of Finance, Government of India. This would be applicable when the advance payment exceeds USD 1, 00,000.

3) Advance payment for import of Aircraft/ Helicopters and Aviation

There are specific guidelines for advance remittances for aviation-related purchases by importers. Companies that are regulated by the Director-General of Civil Aviation (DGCA) to operate airlines are allowed to make advance payments for the import of airline products. Advance payment can be made in this sector without a bank guarantee of up to USD 50 Million. Advance payment can be made up to USD 50 Million without obtaining a letter or a bank guarantee. However, there must be a direct import of the airline/ helicopter products. The payments made for the above must be according to the following conditions:

• Authorized banks must make the transactions according to commercial prudence.
• Know Your Client (KYC) and Due Diligence Checks must be conducted on the interested parties in the transaction.
• Advance remittance must be made directly into the account of the beneficiary account. It must not go through other accounts.
• Authorized Banks are allowed to make their own rules regarding the framework in which they operate.
• When the importer is a Government Institution or a Public Sector Bank or State Government Institution, advance payment for import of diamonds would be allowed subject to the above conditions. Apart from this, a waiver and a bank guarantee are required from the Ministry of Finance, Government of India. This would be applicable when the advance payment exceeds USD 1, 00,000.
• From the date of advance payment, the foreign manufacturer or supplier must provide goods within six months. In the case of capital goods which are used to manufacture final products, such goods must be provided to the importer within three years of the advance payment. An undertaking must be provided by the importer to furnish documentary evidence of the import within 15 days.
• The Authorised dealer has to make sure that the importer has taken all the permissions and compliant with the laws related to Foreign Exchange/ DGCA and the Civil Aviation Authority.
• If the aircraft or spare parts are not imported to India, then the authorized dealer must ensure that the advance payment for the import of spare parts must be repatriated back to India.

4) Advance payment for services import

Services also can be imported into India. However, the Authorised Dealer must make sure that the services offered must comply with the following conditions:

• When the amount of advance payment exceeds more than USD 500,000, a guarantee would be required from the bank, which is of international repute. A guarantee can also be obtained from the authorized bank as a counter-guarantee of the foreign bank, which is situated outside India.
• The authorized bank should ensure that the foreign supplier completes all the obligations in the contract. If the obligations are not fulfilled in the contract, the money must be repatriated back to India.

Therefore advance remittance for import of goods and services depends on different criteria followed by the authorized bank and the RBI.

Conclusion