Knowledge Session: SOFTEX and Inward Remittances

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Knowledge Session: SOFTEX and Inward Remittances

Apurva Singh

@apurvaa

January 28, 2022

Public Policy

988

Backdrop

On the basis of concerns and questions related to SOFTEX and Inward Remittances, on January 19^th, 2022, NASSCOM organised a webinar titled “Knowledge Session: SOFTEX and Inward Remittances” for small and medium enterprises (SMEs).

The session had two parts:

What Software Exporters’ should know about SOFTEX;
Inward Remittances and Compliance: Things to know

The speakers for first session were Mr. Ganesh Nayak, Director – STPI, Thiruvananthapuram and Mr. Harsha K, Partner – SBS & Co. LLP. The speakers for next session were Mr. Huzefa Tavawalla – Head, Disruptive Technologies Practice Group, Nishith Desai & Associates and Mr. Chandrashekar K – Co-Head, Swift India Corporate Services LLP.

The sessions were followed by a Q&A round to address queries from the participants. The sessions witnessed a participation of over 300 participants and was engaging and insightful.

Session 1 – What Software Exporters’ should know about SOFTEX

What is SOFTEX?

In this session, Mr. Harsha informed the participants that filing a SOFTEX is a compliance mandated by FEMA which has to be followed by all software exporters to verify the value of an exported software. It is mainly to prevent laundering or scenarios where software being exported is of a value more or less than inward remittance being received. It also serves as a proof of export for claiming indirect tax refunds.

Who needs to file SOFTEX and obligations under FEMA laws

It was informed to the participants that all software exporters need to file SOFTEX. For SEZ units, the certificate is granted by the Development Commissioner; for STPI units, the certificate is granted by the Director of STPI, and for DTA units, RBI has notified STPI as the authority to receive declarations in SOFTEX forms and to certify the value of exports.

Regulation 6 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 provides for declaration of software exports before the designated official of STPI or SEZs. It was also that the SOFTEX form needs to be filed for computer software including audio/video/television software.

The participants were informed that failure to declare software exports and getting them certified in SOFTEX forms, amounts to violation of FEMA laws and that penalty can be imposed on such defaulters.

Procedural requirements for filing SOFTEX

Mr. Ganesh informed the participants that to file SOFTEX, STPI has a comprehensive portal where application for registration of DTA units can be submitted online. He also specified the documents required for registration including copy of Memorandum of Association, Article of Association, copy of PAN etc.

Mr. Ganesh gave an overview of SOFTEX filing, the documentation and processes therein, and the RBI and Purpose codes required.

Session 2 – Inward Remittances and Compliance : Things to know

FEMA and inward remittances

Mr. Huzefa Tavawalla discussed that when software is exported from India and inward remittances are received, foreign exchange compliances get triggered. The money comes to India either through a capital account transaction or current account transaction. Current account transactions are permitted by law unless expressly prohibited. On the contrary, capital account transactions are prohibited unless expressly permitted. These includes loans, shares etc.

Typical inward remittances which an IT company receives includes service fee from exports, advances in lieu of export of services etc. Otherwise, it is in form of loans, borrowings, ESOPs etc.

Compliances

Mr. Chandrashehar K discussed that under FEMA, investment by a foreign entity, only eligible equity instruments of an Indian entity are treated as Foreign Direct Investments. These instruments are equity or ordinary shares, compulsory convertible preferential shares, compulsory convertible debentures and share warrants.

For sectoral caps and entry routes - under FEMA the FDI should always adhere to sectoral caps and entry routes. Sectoral cap is overall limit of FDI permitted by Government of India in a particular sector, whereas the entry route means if the FDI in a sector requires the government approval of not. If approval is required, it is approval route and if approval is not required, it is termed as automatic route.

Under FEMA, for software development/IT sector, FDI is allowed upto 100% under automatic route. However, per the latest FDI policy, if investment from an investor is coming from countries sharing land borders with India i.e., neighbouring countries, they require government approval i.e., approval route. He also touched upon the reporting requirements by receivers of inward remittances.

FDI Reporting – FIRMS Portal

RBI launched an online portal FIRMS – Foreign Investment Reporting and Management System for integrated FDI reporting into one single form (SMF). SMF consolidates total 9 forms dealing with different types of foreign investments namely.

The pre-requisites for an entity to be eligible for reporting on FIRMS portal includes: a) entity user registration by Indian investee entity which is linked to Corporate Identification Number (CIN); and b) business user registration by the reporting person which is linked to bank account maintained with authorised dealer (AD) bank.

It is the AD bank which processes all FDI reporting made on FIRMS portal except for delays. For delays, it can refer the same to the RBI for approval. In case of delayed reporting, a late submission fee (LSF) is imposed by the RBI per prescribed calculation.

Attached is the slide deck that was presented during the session. The webinar recording is available here.

For more information, kindly write to apurva@nasscom.in.

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