RBI reverses forex relaxation for SEZs

Clamping down  on the delays in repatriating foreign exchange earnings,  the Reserve Bank of India (RBI) has tightened norms for special economic zones (SEZs), asking them to realise and bring back full value of goods and services to India within a year from the date of export. The sudden slide of the rupee prompted the regulator to notify the norm on June 11. The new directive would build pressure not only on SEZ units, but also on their clients abroad to make faster payments.

RBI’s notification lifts a decade-old exemption for these units. There has been no prescription of any time limit for realisation of exports made by the units in SEZs since April 2003. Prior to that, SEZs were required to get their earnings back within one year. Under the SEZ Policy which came into being from 2006, no clear indication was made as to when the value should be realised.   

“RBI has done this to ensure the money comes into the country within time. The units were apparently sitting on the money and working on long-term credit, which has now changed. It used to take anywhere from five months to five years for forex to come into the country. There was a certain rule in the policy but it was never indicated clearly, so we asked RBI this time to bring in more clarity, and hence the notification,” said a commerce department official.

Reliance Industries, which earned $44.1 billion (Rs 2,39,226 crore) in exports last year and has 580,000 barrels a day of crude oil processing capacity at its refinery in a SEZ at Jamnagar in Gujarat, said the RBI norm might not impact the company much. The firm's export earnings come from outside and SEZ. A company spokesperson told Business Standard the company’s forex earnings are for meeting the working capital requirements of the company such as purchasing crude oil.

Besides Jamnagar, RIL owns a multi-product refinery at Jhajjar in Haryana through its subsidiary, Reliance Haryana SEZ Limited. A Reliance SEZ official, who did not want to be identified, explained it was better for a SEZ to get back the money on time rather than work on credit, since the government has imposed Minimum Alternate Tax that requires all companies to pay a certain amount of income tax, irrespective of the exemptions firms enjoy. Besides, there is also dividend distribution tax to pay. 

“Earlier, there was no taxation, so it made sense to delay foreign exchange repatriation. But now, since we have to pay these taxes, we might as well get the money back on time,” said the Reliance SEZ official. He added companies such as RIL take

payment in advance, so this provision does not make much of a difference.

Hitender Mehta, partner, Vaish Associates and co-chairman of Assocham's National SEZ Council, said SEZ units undertake work on credit. But with the new norm, the period has been reduced to 12 months. It would also build pressure on clients for timely payments, said P C Nambiar, director of the Pune-based Serum Biopharma Park (India’s first biotech SEZ) and chairman of the Export Promotion Council for EOUs and SEZs (EPCES). “This is justified at a time when the country needs more money.”

Close to 60 per cent of the SEZs are in the IT/ITeS sector, where the realisation of export receivables is much quicker, so they would not have much issues. However, the cycle of payment differs depending on the nature of the industry and other commercial terms and practices. Merely because a unit is operating from an SEZ does not change the payment cycle, dependent on a number of factors, including the nature of business and the commercial terms with the customer, said Abhishek Goenka, partner, BMR Advisors.

“From a regulatory perspective, however, the time limit for realising and bringing in the export remittances by SEZ units is governed under the Foreign Exchange Management Act, 1999, with powers to RBI to regulate the same.”

In cases where the foreign importer is also a supplier to the Indian exporter, the Indian exporter is allowed to set off the export receivable against the import payable. In all other cases, the foreign exchange has to be repatriated into India.

The June notification has been issued as part of regulations under FEMA. At $88 billion, SEZs earned 30 per cent more in 2012-13 from exports over the previous financial year. It was also a significant jump from $5 billion foreign exchange earnings in 2005-06.

In the latest directive, RBI asked authorised dealer banks to ensure that the units located in SEZs "realise and repatriate full value of goods, software, services, to India within a period of 12 months from the date of export". Any extension of time beyond the stipulated period would require special approval of RBI on a case-by-case basis.

CHECK ON SPECIAL ECONOMIC ZONES

RBI asks SEZs to realise and bring back full value of goods and services to India within a year from the date of export

This lifts a decade-old exemption for these units in force since April 2003

Nearly 60 per cent of the SEZs are in the IT/ITeS sector, where the realisation of export receivables is much quicker so they would not have much issues

SEZs earned $88 billion from exports in FY13, a 30 per cent jump from the previous financial year