CBIC Circular 202/14/2023 Dt. 27 October 2023
CBIC Circular 202/14/2023: In response to numerous requests for clarification regarding the admissibility of receiving export remittances in INR Vostro accounts, as permitted by the Reserve Bank of India (RBI), in the context of the Integrated Goods & Services Tax Act, 2017 (IGST Act), the Central Board of Indirect Taxes and Customs (CBIC) has issued a clarifying statement. This article will break down the key points from the official statement and provide a comprehensive overview of the matter.
Understanding Export of Services under IGST Act
RBI’s Circular on INR Settlement
Foreign Trade Policy (FTP) 2023
Clarification on Export Proceeds in INR
Publicizing the Circular
To ensure awareness and adherence to this CBIC clarification, it is recommended that trade notices be issued to disseminate the information among relevant stakeholders.
Conclusion
This clarifying statement from the Central Board of Indirect Taxes and Customs serves to remove ambiguity surrounding the admissibility of export remittances received in INR Vostro accounts. It underscores the importance of aligning with RBI’s circular on INR settlement and FTP 2023 while also emphasizing the role of INR in facilitating international trade. This clarity should benefit exporters and importers engaged in the trade of services under the IGST Act, 2017.
Note:
1. Conditions under IGST Act for qualifying as an export of services:
Export of services is defined in clause (6) of section 2 of the IGST Act. To qualify as an export of services, a supply of services must meet five essential conditions:
(i) The supplier of service is located in India;
(ii) The recipient of service is located outside India;
(iii) The place of supply of service is outside India;
(iv) 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;
(v) The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.
2. Special Rupee Vostro Account (SRVA) Mechanism
In a bid to bolster India’s global trade growth and elevate the status of the rupee as an international currency, the Reserve Bank of India (RBI) introduced the Special Rupee Vostro Account (SRVA) in July 2022. This innovative mechanism allows for the settlement of international transactions in rupees, emphasizing India’s exports and positioning the rupee on the international stage.
Understanding SRVA:
A Vostro account is an account that domestic banks maintain in the Indian rupee for foreign banks. It serves as a platform for domestic banks to offer international banking services to clients with global banking needs. SRVA is an additional component to the existing system that relies on freely convertible currencies, acting as a complementary system. This means that instead of holding balances in currencies like the US dollar or the pound, SRVA facilitates transactions in Indian National Rupee (INR).
The Framework:
SRVA comprises three crucial elements: invoicing, exchange rates, and settlement. All exports and imports must be denominated and invoiced in INR. The exchange rate between partner countries’ currencies is market-determined, and the final settlement also occurs in INR.
How SRVA Works:
Authorized domestic dealer banks must open SRVA accounts for correspondent banks of partner trading countries.
Domestic importers make payments in INR into the SRVA account of the correspondent bank for the goods or services they receive from overseas sellers.
Domestic exporters receive their export proceeds in INR from the correspondent bank’s designated account in the partner country.
Indian exporters can receive advance payments in INR from overseas importers, fostering seamless international trade.
It’s essential for domestic banks to ensure that the available funds are primarily used to meet existing payment obligations, such as executed export orders or pending export payments. All cross-border transactions must adhere to the guidelines outlined in the Foreign Exchange Management Act (FEMA), 1999.
Eligibility Criteria for Banks:
Authorized domestic banks seeking approval for SRVA must provide details of the arrangement when approached by partner country banks. They must also ensure that the correspondent bank is not from a country listed in the Financial Action Task Force (FATF)’s high-risk and non-cooperative jurisdictions. Furthermore, authorized banks can open multiple SRVA accounts for various banks from the same partner country.
Benefits of the SRVA Arrangement:
Reduced Forex Demand: The SRVA framework can significantly reduce the net demand for foreign exchange in settling current account-related trade flows, as per the Economic Survey (2022-23).
Reduced Vulnerability to External Shocks: The diminished reliance on foreign currencies makes India less susceptible to external economic shocks.
Promoting the Rupee as an International Currency: Over the long term, the SRVA mechanism will play a pivotal role in promoting the rupee as an international currency, gradually increasing its presence in international trade. According to the Bureau for International Settlements’ Triennial Central Bank Survey 2022, the INR currently accounts for 1.6% of all trades, with the U.S. dollar dominating at 88%.
To Access the CBCI Circular 202/14/2023 CLICK HERE
To Access the CBIC Notification No. 52/2023 CLICK HERE
To Access the CBIC Circular No. 204/16/2023 CLICK HERE
To ccess the CBIC Circular No. 203/15/2023 CLICK HERE
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