[Jayesh H practises at the Trifecta of Law, Finance & Governance, and thanks Muskaan Shah for assisting with this post]
The recent draft of the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024, issued by the Reserve Bank of India, has been projected as an initiative to streamline the export and import processes. Its primary objective is to enhance the ease of doing business, particularly for small exporters and importers. However, when one gets down to brass tacks, one wonders about the extent to which ground realities have been factored in in the making of these regulations, particularly with respect to small exporters’ operations.
A significant change introduced in the draft regulations is the requirement for exporters of any service to declare the full value of the exported services. This marks a substantial shift from the current regulations, which primarily focus on the export of software services. Like the existing framework, the proposed regulations do not offer any de minimis thresholds or exemptions, thereby including all types of service exports. This broad scope may warrant further reconsideration..
Before delving into the specific details, it is crucial to consider whether these regulations adequately reflect the realities of small businesses. For example, various services provided by individuals in India—such as tutoring students in the United States, assisting with homework, conducting online fitness sessions, or offering holistic wellness services—qualify as export of services due to their cross-border nature. These activities, though diverse, are fundamentally similar to the services provided by Knowledge Process Outsourcing (KPO) firms or law firms for their offshore clients. In this context, requiring compliance from such services do not align with the stated objective, i.e., the one of simplifying and enhancing ease of doing business. Moreover, many of these services are provided by solopreneurs and are often informal, with transactions typically involving modest amounts, such as “A Fistful of (100) Dollars” or even less.
Ignorance of the law is no excuse, but that does beg the question: why make a large population offender from day one? Even if there is a widespread campaign to educate all and sundry, for what benefit? If you assume 1 lakh solopreneurs and on average earning USD 1,000 per month, that results in USD 100 Mn per month and USD 1.2 Bn per annum. Even Food and Safety Standards Authority of India (FSSAI) in 2019 stipulated a threshold Rs. 12 lakhs. In today’s terms, that would be like USD 2,000 per month. FSSAI has exempted last mile delivery persons, direct selling agents and single entity owned business from getting an FSSAI registration.
As we assess the potential impact of these proposed regulations, it is essential to consider whether this broad inclusion will indeed enhance business efficiency or if it might inadvertently make individuals and small service providers as FEMA violators. In this context, the following requirements of the EXIM regulations are entirely inconsistent with their larger aim of simplifying and enhancing ease of doing business:
- The draft regulations apply the same reporting requirements to all types of service exports. This approach may fail to account for the distinct needs of various service sectors, such as online, recurring, and micro-services.
- The export declaration form seems primarily tailored to goods and software services, which could potentially create challenges for reporting and compliance in other service categories.
- Mandating formal written contracts for every micro-service may be impractical. A significant number of solopreneurs operate without formal contracts, which could lead to non-compliance with the proposed regulations.
- In a digital gig economy, there are many platforms which act as matchmakers and payment facilitators. The draft regulations assume that every service will be invoiced, raising questions about how to handle services without invoices. Ideally, such transactions—or at least those below a monetary threshold—should be excluded from reporting.
- The export declaration form requires the client’s name and address but may not accommodate situations where the payee differs from the recipient. In many instances, the recipient of services may be a minor, and payments made through third-party platforms could introduce additional compliance challenges.
- The draft regulations do not adequately address the complexities associated with payments made through digital platforms and mobile apps. Services paid via platforms such as PayPal or Remitly may present reporting challenges due to differing transaction processing practices.
- Lastly, consider the modern body shopping, which essentially involves labour cost arbitrage. Photographers from India being hired for events outside India is a small example.
The RBI’s proposed draft regulations for export and import transactions are on the whole undoubtedly aimed at enhancing reporting efficiency and compliance. However, it is important to consider whether these extensive changes are truly necessary. While the goal of streamlining processes is commendable, the broad application of these regulations could inadvertently impose burdens on solopreneurs providing services from home, such as housewives. Introducing exemptions for specific service categories and establishing De Minimis thresholds could provide a more balanced approach. For instance, scaling reporting requirements to align with the size of the transaction would offer significant relief to solopreneurs and smaller businesses. By considering these adjustments, the regulatory framework could be designed not only to simplify processes but also to accommodate the ground realities, especially as regards ‘informal’/micro services.
All this begs the question as to what are the benefits in wanting micro, especially solo, service exporters to adopt and ensure so many compliances. Hopefully, “Not everything that can be measured matters and not everything that matters can be measured”, will start getting imbibed by the government. That will truly result in Ease of Doing Business for Indians!
– Jayesh H
