Banks get tough on write-off of service export receivables
Jan 10, 2025
Synopsis
Banks are now closely scrutinizing write-offs of service export receivables due to suspicions of money parking abroad. Regulations permit limited self-write-offs for goods, but banks are hesitant to extend this to services. New RBI guidelines may bring clarity to service export transactions.
Several banks are stopping companies from writing off amounts they are supposed to receive for services to foreign clients amid suspicion that it’s a ploy to park money abroad.
Unlike cross-border trade of goods which are backed by shipping documents, it’s virtually impossible to track export and import of services.
Companies indulging in such sharp practices would typically instruct the foreign client to deposit the fees, or a slice of it, in a separate bank account abroad --- and then, a year later, the amount is written off on the pretext that the overseas buyer has suffered losses or is untraceable.
In the normal course of business, banks would not catch a whiff of such transactions as they are not required to compare amounts on the original invoices with the amount subsequently remitted by the overseas buyers. For years, it didn’t matter. But, today banks are beginning to question such write-offs as moire and more matters are being referred to them.
“Bankers have become stringent on service providers who are not realising the full value of invoices. Earlier companies used to take it lightly, but now auditors are making it mandatory for them to take prior approval before write-off (of receivables) or write- back of payments (for which services are yet to be delivered). So, companies can no longer take unilateral action without prior approval of their authorised dealer banks. Understandably, some companies are in a fix,” said Rajesh P. Shah, partner at the CA firm Jyantilal Thakkar & Company.
What is also holding back banks is a sterner interpretation of regulations. According to the Reserve Bank of India’s master directions on export of goods and services, exporters can self-write-off receivables up to 5% of previous year’s export earnings while banks have to clear write-offs up to 10%, subject to a few conditions like the receivable being due for more than a year, submission of documents to demonstrate that an exporter has taken necessary efforts to recover the money, and that the entity has been a regular customer of the bank for at least 6 months. Larger write-offs are permitted in extreme circumstances like the foreign buyer being declared insolvent or the goods having been auctioned or destroyed by port or customs authorities of the importing countries.
However, following interactions with RBI, banks have taken the view that such write-offs only relate to export of goods, but not applicable to export of services --- one of the key reasons why banks are questioning write-offs of service export receivables, irrespective of the quantum.
According to Harshal Bhuta, partner at the CA firm P. R. Bhuta & Co, which specialises on international tax and foreign exchange laws among other things, “Ideally, the provisions dealing with write-off and netting off should also apply to export of services transactions since these provisions eventually relate to realisation of foreign exchange dues, the broad framework of which equally applies to export of goods as well as services. There will be more clarity on this in the upcoming revised trade notification to be issued by RBI where RBI has proposed to cover export of services too under EDPMS.” EDPMS, or the export data Processing and Monitoring System is an online platform, introduced by the central bank, for tracking export transactions.
Some of the netting transactions --- where a company offering a service to an offshore partner or its foreign parent adjusts the receivables against the amount payable for some service received from the same foreign entity --- are also being questioned.
[The Economic Times]
