Buyers Credit Process Flow, Tax Agreements and Benefits

Buyer’s credit is a loan facility by a bank or financial institution to purchase raw materials and capital goods or services. It is extended to the importer by an overseas bank generally for large export orders. Overseas  bank credits the Nostro account of the importer based on the letter of undertaking. The funds are in turn used to make payments against import bill to the supplier’s bank . Buyer’s credit is a short term credit . It aids the local importer  to gain easy access to cheap foreign funds. The funds may be close to Libor rates , which are comparatively less costly than local source of funds. The funds duration may vary as per local regulations and requirements. PROCESS FLOW OF BUYER’S CREDITThe customer should be an existing current account holder in a bank to avail buyer’s credit. Some banks offer buyer’s credit even without current account. Buyer’s credit is availed through transaction basis. RBI, in its circular to external commercial borrowing and trade credit, has issued guidelines on the process flow for importers to access buyer’s credit . Steps involved in the process are:Importer  requests the consultant to arrange the buyer’s credit before the date date of the bill.Consultant approaches overseas financial institutions for buyer’s credit.Best rate of interest is quoted to the importer.After acceptance of the importer, financial institutions are requested to provide a buyer’s credit offer letter in the name of the importer  arranged by the consultant. Overseas financial institutions funds the existing bank’s Nostro account with the required amount as per the instructions in the LOU/LOC.Payments are made against the import bill by the existing bank by utilizing the funds credited.(cross currency contract is also permitted by RBI)The importer’s bank will recover the required amount from the importer on  the due date and remit the same to overseas bank.(Principal+interest is paid based on the pricing quoted in letter of credit)This aids the importer in working capital management.In reference to the above, general guidelines policies and procedures may vary from each bank.Banks are permitted to provide buyer’s credit up to US $20 million per transaction with maturity period of 1 year from the date of shipment. In case of capital goods, maturity period can be extended upto three years. Banks will however restrict the tenure of buyer’s credit to the working capital cycle of the client. Rollover beyond the mentioned period requires approval from RBI. The following chart  explains the process flow of funds from overseas bank:WITHHOLDING TAX ON BUYER’S CREDITWHAT IS WITHHOLDING TAX?Under section 195 of the income tax act 1961 the tax has to be deducted by the Indian importer on the interest amount paid for the loans borrowed. On the interest amount for the funds arranged from foreign bank, the importer has to pay tax known as withholding tax (WHT). Rates charged by the overseas  lenders are net of taxes; thus it has to be grossed up at the time of calculation of interest and the borrower bears tax payment as his additional  cost.                                    Withholding tax may vary from each country as per DTAA( Double Taxation Avoidance Agreement). There are about 83 countries where India has DTAA. For this to be applicable, the lending institution should have an Indian Pan card . If no pan card is provided, it  may entail the following calculations- 1) At the rate specified in the relevant provisions of this act 2) Rates in force 3) At the  rate of 20%. WHT will not be applicable  if the loans raised are from overseas branch of Indian  bank. Indian bank is considered as a resident of India as per section 9 of the Income Tax Act. Application of “tax treaty” may limit the WHT tax rates. In such cases, the surcharge and education cess will not be applicable. Interest payments on funds arranged from banks based at Mauritius will not carry any WHT  as per “India Mauritius Double Taxation Avoidance Treaty” (article 113(c)) In respect of a taxpayer to whom DTAA applies, provisions of Indian Income Tax Act or the provisions of DTAA, whichever is more beneficial can be applicable.  Taxpayer can take advantage of that provision in DTAA  for deductions of tax.BENEFITS OF BUYER’S CREDITAccess to foreign funds at cheaper costs as the rate of interest is linked with LIBOR rates.The exporter is paid on the due date of the bill, whereas the importer gets extended date for making import payments.The funding currency depends on the choice of the customer it can be in any FCY(USD, GBP, EURO,JPY).Open account, collections or LC’s can be used by the importer to finance any form of trade.The funding currency can be different from the currency of imports which enables importer to take a favourable view of a particular currency.Payments on goods are received by the supplier as per the LC payment terms.Further rollover of buyer’s credit can also be requested by the buyer.                                               Buyer’s credit avails number of advantages  to the parties involved in the process and helps Indian importer access Global markets .
Kranthi Tilak Reddy
Rated 4.0/5 based on 20 customer reviews
Sort by :

Buyers Credit Process Flow, Tax Agreements and Benefits

Kranthi Tilak Reddy
Blog
18th Aug, 2017
Buyers Credit Process Flow, Tax Agreements and Benefits

Buyer’s credit is a loan facility by a bank or financial institution to purchase raw materials and capital goods or services. It is extended to the importer by an overseas bank generally for large export orders. Overseas  bank credits the Nostro account of the importer based on the letter of undertaking. The funds are in turn used to make payments against import bill to the supplier’s bank . Buyer’s credit is a short term credit . It aids the local importer  to gain easy access to cheap foreign funds. The funds may be close to Libor rates , which are comparatively less costly than local source of funds. The funds duration may vary as per local regulations and requirements.

PROCESS FLOW OF BUYER’S CREDIT

The customer should be an existing current account holder in a bank to avail buyer’s credit. Some banks offer buyer’s credit even without current account. Buyer’s credit is availed through transaction basis. RBI, in its circular to external commercial borrowing and trade credit, has issued guidelines on the process flow for importers to access buyer’s credit . Steps involved in the process are:

  1. Importer  requests the consultant to arrange the buyer’s credit before the date date of the bill.

  2. Consultant approaches overseas financial institutions for buyer’s credit.

  3. Best rate of interest is quoted to the importer.

  4. After acceptance of the importer, financial institutions are requested to provide a buyer’s credit offer letter in the name of the importer  arranged by the consultant.

  5. Overseas financial institutions funds the existing bank’s Nostro account with the required amount as per the instructions in the LOU/LOC.

  6. Payments are made against the import bill by the existing bank by utilizing the funds credited.(cross currency contract is also permitted by RBI)

  7. The importer’s bank will recover the required amount from the importer on  the due date and remit the same to overseas bank.(Principal+interest is paid based on the pricing quoted in letter of credit)

  8. This aids the importer in working capital management.

In reference to the above, general guidelines policies and procedures may vary from each bank.

Banks are permitted to provide buyer’s credit up to US $20 million per transaction with maturity period of 1 year from the date of shipment. In case of capital goods, maturity period can be extended upto three years. Banks will however restrict the tenure of buyer’s credit to the working capital cycle of the client. Rollover beyond the mentioned period requires approval from RBI.

The following chart  explains the process flow of funds from overseas bank:



WITHHOLDING TAX ON BUYER’S CREDIT

WHAT IS WITHHOLDING TAX?

Under section 195 of the income tax act 1961 the tax has to be deducted by the Indian importer on the interest amount paid for the loans borrowed. On the interest amount for the funds arranged from foreign bank, the importer has to pay tax known as withholding tax (WHT). Rates charged by the overseas  lenders are net of taxes; thus it has to be grossed up at the time of calculation of interest and the borrower bears tax payment as his additional  cost.                                    

Withholding tax may vary from each country as per DTAA( Double Taxation Avoidance Agreement). There are about 83 countries where India has DTAA. For this to be applicable, the lending institution should have an Indian Pan card . If no pan card is provided, it  may entail the following calculations-

1) At the rate specified in the relevant provisions of this act

2) Rates in force

3) At the  rate of 20%.

WHT will not be applicable  if the loans raised are from overseas branch of Indian  bank. Indian bank is considered as a resident of India as per section 9 of the Income Tax Act. Application of “tax treaty” may limit the WHT tax rates. In such cases, the surcharge and education cess will not be applicable. Interest payments on funds arranged from banks based at Mauritius will not carry any WHT  as per “India Mauritius Double Taxation Avoidance Treaty” (article 113(c)) In respect of a taxpayer to whom DTAA applies, provisions of Indian Income Tax Act or the provisions of DTAA, whichever is more beneficial can be applicable.  Taxpayer can take advantage of that provision in DTAA  for deductions of tax.

BENEFITS OF BUYER’S CREDIT

  1. Access to foreign funds at cheaper costs as the rate of interest is linked with LIBOR rates.

  2. The exporter is paid on the due date of the bill, whereas the importer gets extended date for making import payments.

  3. The funding currency depends on the choice of the customer it can be in any FCY(USD, GBP, EURO,JPY).

  4. Open account, collections or LC’s can be used by the importer to finance any form of trade.

  5. The funding currency can be different from the currency of imports which enables importer to take a favourable view of a particular currency.

  6. Payments on goods are received by the supplier as per the LC payment terms.

  7. Further rollover of buyer’s credit can also be requested by the buyer.                                               

Buyer’s credit avails number of advantages  to the parties involved in the process and helps Indian importer access Global markets .

Kranthi
Blog Author

Kranthi Tilak Reddy is one of the co founders and COO of White Matter Advisory services P Ltd. He is an Engineering graduate from SRM University and has done his Masters in finance.Being a true go-getter and an optimist to the core he has grown up the ranks in banking industry at an astonishing rate, his last stint being Associate Director, Business Clients -South with Standard Chartered Bank. With over 10 years of association with SME businesses and clients he certainly brings rich vein of expertise to the WMA table but more importantly his alluring passion towards great and customer service” the foundation on which he asserts WMA has been built.

Leave a Reply

Your email address will not be published. Required fields are marked *

SUBSCRIBE TO OUR BLOG

Follow Us