It is my effort to share concept of Third-party exports and Third-party imports. This article explains meaning of third-party along with requirement to be followed for third-party exports and third party imports, GST provision on the same, customs guideline and finally RBI requirement to fulfill the conditions for third-party exports and third-party import.
Liberalization of Third-party exports and Third-party imports:
Earlier, payment for exports was to be received from the overseas buyer named in the Export Declaration Form (EDF) and currency of such payment should be as per the final destination of the goods/services irrespective of residential status of the buyer.
Similarly, payments for import should be made to the original overseas seller of the goods and importer needs to satisfy that goods equivalent to remittance have been imported.
With a view to liberalize the procedure relating to payments for exports/imports and taking into account evolving international trade practices, Reserve Bank of India has incorporated third-party exports and third-party imports vide circular A. P. (DIR Series) Circular No.70/ RBI/2013-14/364 dated November 8 ,2013.
What is third-Party:
A third party is someone who is not one of the main people involved in a business agreement or legal case, but who is involved in it in a minor role. Any individual who does not have a direct connection with a legal transaction but who might be affected by it. A third–party beneficiary is an individual for whose benefit a contract is created even though that person is a stranger to both the agreement and the consideration.
Understanding of Third-Party transactions:
When a buyer and seller enter into a business deal, they may decide to use the services of an intermediary or third party who manages the transaction between both parties. For example, if a company X sells inventory to its subsidiary, company Y, a third-party transaction occurs when company Y sells those final goods to company Z. A third-party transaction often involves a seller, a buyer, and an additional party not connected to the others.
When an individual or entity (importer) imports goods on behalf of another individual or entity and make payment to third-party on behalf of seller, it is called the third-party imports. For example X has imported books from Y, USA, worth CIF value of USD 25,000. Y requested X to remit the amount to Z on behalf of Y. Here consignee would be X and buyer is Z and in AWB/BL consignee would be X and Notify would be Z.
Whenever an individual or entity (exporter) makes an export on the behalf of another individual entity or individual (exporter or manufacturer), it is called third-party exports. In such cases, export documents such as shipping bills shall indicate name of both exporter and third-party exporter. BRC, GR declaration, export order and invoice should be in the name of third-party exporter.
Foreign Inward Remittance Certificate (FIRC) is the legal document that shows that a certain individual or entity has received a remittance from outside the country. During third-party exports, the FIRC is furnished in the name of the said exporter instead of the actual manufacturer/exporter of the shipment.
An assessee who supplies goods and services may not have the infrastructure to undertake the export. Hence, the assessee may utilise the services of an intermediary for carrying out the export transaction. The intermediary is known as the third party exporter. The supplier of the exported goods and services is known as the manufacturer exporter.
Advantages of Third-Party Exports
In case of third-party exports manufacturer need not register with Reserve Bank of India because the third party who are obtaining foreign exchange receipts should register with the Reserve Bank of India (RBI).
Under a third-party export, the foreign inward remittance from the customer is received by the third party explorer. The inward remittance is received in foreign currency. However, the settlement between the third party exporter and the manufacturer exporter is made in rupees. Hence, the manufacturer explorer need not undertake the procedure for conversion of foreign exchange.
By making use of the services of the third party exporter, the manufacturer exporter can concentrate on the core business.
The manufacturer exporter can make use of the expertise of the third party explorer.
The third-party explorer helps the manufacturer exporter to procure orders from customers.
What is the difference between Deemed Export and Third-Party Exports:
“Deemed Exports” refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange.
“Third Party Exports” means exports made by an exporter or manufacturer on behalf of another exporter. In such cases, export documents such as shipping bills etc. shall indicate the name of both the manufacturing exporter/ manufacturer and third-party exporter.
How Third-Party export works:
How Third-Party import works:
Reserve Bank of India guideline on third party imports:
Circular A.P. (DIR Series) Circular No.100/ RBI/2013-14/479 dated February 4, 2014
AD category I banks are allowed to make payments to a third party for import of goods, subject to conditions as under:
Reserve Bank of India guideline on third party exports:
Master Circular No.14/2015-16 RBI/2015-16/83 dated July 01, 2015
a) Firm irrevocable order backed by a tripartite agreement should be in place. However, it may not be insisted upon in cases where documentary evidence for circumstances leading to third party payments / name of the third party being mentioned in the irrevocable order/ invoice has been produced subject to:
(i) AD bank should be satisfied with the bona-fides of the transaction and export documents, such as, invoice / FIRC.
(ii) AD bank should consider the FATF statements while handling such transaction.
b) Third party payment should be routed through the banking channel only;
c) The exporter should declare the third-party remittance in the Export Declaration Form and it would be responsibility of the Exporter to realize and repatriate the export proceeds from such third party named in the EDF;
d) It would be responsibility of the Exporter to realize and repatriate the export proceeds from such third party named in the EDF.
What is Firm irrevocable purchase order?
Irrevocable Corporate Purchase Order (ICPO) is a document drawn up by commercial buyers. It contains: the quantities of products required. the type of products required. other conditions that the buyer wants the sale to proceed under. Once the ICPO is issued, it must be honoured by both parties; the buyer and supplier. If either party does not honour this commitment, this will be considered as a major offense. An ICPO is a legally BINDING document. We can differentiate purchase order from the irrevocable purchase order on the basis of content. I am giving you one sample of content of irrevocable purchase order:
“We, (name of the buyer), hereby state and represent that it is our intention to purchase and we hereby confirm that we are ready, willing and able to purchase the following commodity as per the specification and in the quantity and for the price as specified in the terms and conditions as stated below.”
The irrevocable purchase order should contain , name of the commodity, name of the third-party in case of third-party transaction, quality, quantity, contract term, price, commission, loading port, delivery term, packaging, payment method ,inspection, etc.
What is Financial Action Task Force (FATF) Statement?
The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. It’s aim is to protect the global financial system against money laundering, terrorism financing and other related threats to the integrity of the international financial systems. Authorised dealers should set up their own KYC to maintain FATF guideline.
Commercial invoice term: Apart from the usual content in commercial invoice the seller should mention the third-party name i.e. beneficiary name in commercial invoice under the heading “ NOTIFY”. This field is usually only required if it’s different from the party listed in the consignee field. The notify party can be the buyer himself, the shipping agent, or any other entity. The notify party is usually also responsible for arranging customs clearance at destination.
Bill of Entry: Separate disclosure is required at the time of filling BE i.e. related payment has to be made to the (named) third party.
Export Declaration form (EDF): An export declaration is a type of form submitted at the port, providing details about the goods that are bound for export. The export declaration is required each time goods are exported to a country outside the EU, and the document is used by the customs authority to control exports. The exporter should declare the third-party remittance in the Export Declaration Form and it would be responsibility of the Exporter to realize and repatriate the export proceeds from such third party named in the EDF.
GST on Third-Party Exports
A third party export is a transaction in which the manufacturer makes an export through another person. Third-party exports are eligible for concessional rates of GST.
The concessional rates were introduced by the Central Board of Indirect Taxes and Customs (CBIC). The manufacturer who supplies goods and services may not have the infrastructure to undertake the export. Hence, the manufacturer may utilise the services of an intermediary for carrying out the export transaction. The intermediary is known as the third- party exporter.
The supplier of the exported goods and services is known as the manufacturer exporter. In the export documents, the name of the manufacturer exporter and the third-party exporter are mentioned. Hence, both the manufacturer exporter and the third-party exporter are understood to be making the export jointly.
As per the notifications provided by the CBIC, the concessional rates can be availed by manufacturer who fulfil the specified conditions.
Conditions of Third-party Exports:
1. The manufacturer exporter and third-party exporter both should be resident of India.
2. The exports needs to be completed within 90 (ninety) days from the date of GST invoice.
3. In export documents the manufacturer and the third-party exporter should be mentioned jointly.
The concessional rates of GST are available on the export of goods only. Exporters of services cannot make use of the concessional rates.
5. Both the third party exporter and the manufacturer exporter should have a valid GST Registration.
The third-party exporter and the manufacturer exporter should not have made a consecutive default in filing GST returns. The condition should be satisfied for the preceding six months.
7. The supply of goods from the manufacturer exporter to the third party exporter should take place through a GST invoice.
The GST registration particulars of both the third party explorer and the manufacturer explorer should be available in the shipping bill.
9. The third-party exporter should be registered with an Export Promotion Council (EPC).The registration should be approved by Department of Commerce.
10. The third-party exporter should move the goods from the premises of the manufacturer exporter to any of the following places:
a) The port, airport, land customs station or inland container depot from which the export is scheduled to take place
b) A registered warehouse as a temporary transit point before the goods are moved to a port, land customs station, inland container depot or airport from which the export is scheduled to take place
11. A third party explorer may aggregate supplies from several manufacturer exporters. The combined goods may be exported in a single or multiple shipments.
12. The third-party exporter should endorse the receipt of goods on the GST invoice. The third-party explorer should also obtain an acknowledgement from warehouse operator for receiving the goods in the registered warehouse.
13. The proof that the export was carried out should be provided to the manufacturer exporter.
14. The registered supplier shall not be eligible for exemption if the registered recipient fails to export the aid goods within a period of ninety days from the date of issue of Tax invoice.
GST Rate for Third-Party Exports:
The concessional GST rate which is available for third party exports is available in Notification No. 41/2017-IT(R) and Notification No. 40/2017-CT(R) dated 23rd October 2017. The applicable rates are the following:
Requirement to be fulfilled for third-party imports as per Customs Law:
All payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party must assure that such payments are not included in the price actually paid or payable.
Points for consideration regarding Price actually paid or payable :
The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the value of imported goods. The value of imported goods shall not include the following charges or costs
The following points shall also be considered while determining the assessable value:
(i) Where the cost of transport is not ascertainable, such cost shall be 20% of the free on board value of the goods. In the case of goods imported by air, even where the cost of transportation is ascertainable, such cost shall not exceed 20% of free on board value of the goods.
(ii) where the cost of insurance is not ascertainable, such cost shall be 1.125% of free on board (FOB) value of the goods;
(iii) loading, unloading and handling charges shall be 1% of the free on board (FOB) value of the goods + the cost of transport + cost of insurance .Where the free on board value of the goods is not ascertainable, then a) Costs of transportation shall be 20% of the FOB value of the goods + cost of insurance and b) Cost of insurance shall be 1.125% of the free on board value of the goods + cost of transport.
Requirement to be fulfilled for Third party exports as per GDFT:
As per chapter 9.62 of DGFT guideline , third-party exports means exports made by an exporter or manufacturer on behalf of another person. In such cases export documents such as shipping bills shall indicate name of both manufacturing exorter/manufacturer and third party exporter. Bank realisation certificate (BRC), GR declaration, export order and invoice should be in the name of third- party exporter.
Acceptance of Third Party Exports under various Export Promotion Schemes
Third party exports are intended to service the manufacturer exporters who may not be able to export directly and would therefore avail of the services of a third party namely merchant exporters. The third party thus in effect acts a marketing wing in the entire export transaction and the intention of policy is to remit/ exempt duty on the inputs used in the export product.
Both the provisions under para 2.34 and 9.55 of the Exim Policy clearly imply that third party exports are applicable for all the export promotion schemes of the Exim Policy provided the name of the manufacturer and the third party are mentioned on the shipping bill.