Buyer's credit

1. Buyers Credit  Buyer’s Credit refers to loans for payment of imports into India arranged on behalf of the importer through an overseas bank. The offshore branch…
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  • 1. Buyers Credit  Buyer’s Credit refers to loans for payment of imports into India arranged on behalf of the importer through an overseas bank. The offshore branch credits the nostro of the bank in India and the Indian bank uses the funds and makes the payment to the exporter’ bank as an import bill payment on due date. The importer reflects the buyers’ credit as a loan on the balance sheet. NOTE- Nostro Account is an account of an Indian Bank with a Bank Outside India In foreign Currency.The counter Part of It is Vostro Account, which means the account that the foreign bank has with Indian bank.
  • 2. Benefits of Buyer’s Credit  The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows.  The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers’ credit route to avail financing.  The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.  The importer can use this financing for any form of trade viz. open account, collections, or LCs.  The currency of imports can be different from the funding currency, which enables importers to take a favorable view of a particular currency . 2
  • 3. Financing Terms LCs (Letter Of Credit)-: A letter from a bank guaranteeing that a buyers payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Collections-: A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offers no verification process and limited recourse in the event of non- payment. Drafts are generally less expensive than LCs. 3
  • 4.  Open Account: An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export working capital financing, government-guaranteed export working capital programs, export credit insurance, export factoring, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of nonpayment by the foreign buyer. 4
  • 5. Buyers Credit Process flow Indian customer imports the goods either under DC / LC, DA / DP or Direct Documents. Indian customer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit finance. Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer. If pricing is acceptable to importer, overseas bank issue’s offer letter in the name of the Importer. Importer approaches his existing bank to get letter of undertaking / comfort (LOU / LOC) issued in favour of overseas bank via swift. A Letter of Comfort is a letter issued to lending institution by a parent company acknowledging the approval of a subsidiary company’s attempt for financing.It doesn’t guarantee the loans approval for the subsidiary company. On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will either funds existing bank’s Nostro account or pays the supplier’s bank directly Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment). On due date existing bank to recover the principal and Interest amount from the importer and remit the same to Overseas Bank on due date. 5
  • 6. Cost Involved Interest cost: This is charged by overseas bank as a financing cost. Normally it is quoted as say “3M L + 350 bps”, where 3M is 3 Month, L is LIBOR, & bps is Basis Points (A unit that is equal to 1/100th of 1%). To put is simply: 3M L + 3.50%. One should also check on what tenure LIBOR is used, as depending on tenure LIBOR will change. For example as on day, 3 month LIBOR is 0.33561% and 6 Month LIBOR is 0.50161% LIBOR The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. Libor rates are calculated for ten currencies and 15 borrowing periods and are published daily at 11:30 am. LIBOR initially fixed rates for three currencies. (London time) by Thomson Reuters. Australian dollar (AUD), Canadian dollar (CAD), Swiss franc, Danish krone (DKK), Euro (EUR), British pound sterling (GBP), Japanese yen (JPY), New Zealand dollar (NZD), Swedish krona (SEK), U.S. dollar (USD).Current LIBOR Rate is 6
  • 7.  Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking Arrangement fee: Charged by Buyers Credit Agents / Brokers how is arranging buyer’s credit for you. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges etc. Withholding Tax(WHT): The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities. (The WHT is not applicable where Indian banks arrange for buyers credit through their offshore offices.) 7
  • 8. CONCEPT OF WITHHOLDING TAX It Is a Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them. Tax paid is the additional cost that needs to be borne by the borrower. Withholding Tax is paid as per Income Tax Act, 1961 which varies from country to country as per DTAA (Double Taxation Avoidance Agreement) between India and the lender’s country. There 83 countries where India has DTAA. One of the condition to use DTAA rate is that lending institution should have an Indian Pan Card. 8
  • 9. WITHHOLDING TAX IN DETAIL It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be non- resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and so may investigate any anomalies that might indicate tax evasion. 9
  • 10. Treaties :Interest Clause(WHT) USA:(a)10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ; and (b) 15 per cent of the gross amount of the interest in all other cases. Uk : 10% if interest is paid to a bank; 15% for others Singapore: 10% if interest is paid to a bank; 15% for others Mauritius: As per Double Taxation Treaty with Mauritius, withholding tax on interest payment to Financial Institution is nil. When foreign bank quote for buyers credit they quote as net of withholding tax. Thus one needs to do grossing up interest at the time of calculating WHT. Nil Withholding tax on Interest payment on funds arranged from Banks based out Mauritius. No Withholding tax on loans raised from overseas branch of Indian bank 10
  • 11. Flow of payment of withholding tax First check the country from which buyer’s credit is to be made available to finalize rate of TDS. Deposit the tax through challan no. 281 (nature of payment 195). Get Form 15CB issued from Chartered Accountant (CA) for the buyers credit interest payment. Submit online Form 15CA based using form 15CB provided by CA. Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for buyers credit interest. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195). AD Bank forwards a copy of document to Assessing officer / Income Tax Department 11
  • 12. Consequence of Non Deduction ofWithholding Tax (WHT / TDS) As with other TDS defaults the consequences for Non deduction of Withholding Tax (WHT) may be broadly classified as under: 1.As Per Sec 40(i)(a) if Withholding Tax is not paid then the Interest paid on buyers credit will be Disallowed. 2. Simple Interest at 12 % p.a. u/s 201A from the date on which tax was deductible to the date on which tax is actually deducted. The rate of Interest is 1.5 % per month or part thereof, from the date on which tax was actually deducted to the date on which tax is actually paid. 3. Penalties for non deduction (u/s 271C) (Minimum Penalty is the amount of tax which such person has failed to deduct or pay) and failure to pay the deducted tax to the government (u/s 221) (Minimum Penalty is any such amount as the Assessing Officer may impose and maximum Penalty is upto tax in arrears) 4. Prosecution u/s 276B 12
  • 13. Accounting treatment On Goods Being imported from the foreign countries , For obtaining buyers credit and its payment normal Journal Entries are passed, however When due to foreign currency fluctuation income or loss is booked ,Following Journal Entry Is Passedwhen gain is booked Party A/c Dr Xxxxxx To Forex Gain A/c Cr xxxxxxwhen loss is booked Forex loss A/c Dr Xxxxxx To Party A/c Cr xxxxxx 13
  • 14. Disclosure Requirements In Balance Sheet Buyers’ credit Taken for more than one year shall be disclosed under the head Secured liabilities under the Subhead Sources of funds or else it should be disclosed under the head Current Liabilities Under sources of Funds. In Profit and Loss Statement LC issuance charges, LoU issuance charges, Bank Commission is considered as expenses as Bank Charges and Bank Interest are disclosed under the head of Finance Cost. Gain due to Currency Fluctuation is considered as income as Exchange Gain and disclosed under the head of Other Income. A. Amount and Maturity Maximum Amount Per transaction : $20 Million Maximum Maturity in case of import of non capital goods: upto 1 year from the date of shipment Maximum Maturity in case of import of capital goods : upto 3 years from the date of shipment Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector: Upto 5 years from the date of shipment 14
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