If you're an importer bringing goods into the country. Once the goods are on their way, you’ll deal with financial arrangements to pay your suppliers. Let’s dive into how this works under FEDAI Rule 3.
Interest on Import Bills
When you import goods and the payment is made through a letter of credit (LC), the interest charged on the bills will be the same as the commercial interest rate that banks charge on their domestic loans. The Reserve Bank of India (RBI) also has rules about how much interest can be sent overseas, which banks must follow.
Crystallization of Import Bills
If you have unpaid import bills under a letter of credit, your bank will convert these foreign currency amounts into rupees. This process is known as crystallization. Each bank has its policy for this, and you need to know what your bank’s policy is.
Applying the Exchange Rate
When it comes to paying these import bills, the exchange rate applied depends on whether you have a hedge contract (a kind of financial agreement to lock in an exchange rate) or not:
Paying Import Bills:
With a Hedge Contract: If you have a hedge contract, the exchange rate agreed upon in the contract will be used.
Without a Hedge Contract: If there's no hedge contract, the bank will use the current prevailing bill selling rate to convert the foreign currency into rupees.
Crystallizing Import Bills:
The same rules apply as above. If you have a hedge contract, that rate will be used. If not, the bank’s current bill-selling rate will be used.
Stamp Duty on Import Bills:
When it comes to determining the stamp duty on your import bills, the exchange rate provided by the relevant authority will be used.
Let’s say you’re importing machinery from abroad and the payment is arranged through a letter of credit. Here’s how it plays out:
Interest on Bills:
The bank charges you interest on the import bills at the same rate they charge for domestic loans.
If the bills are interest-bearing, the RBI's directives will apply to any interest payments you need to make overseas.
Crystallization:
If you haven’t paid the bills by the due date, your bank will convert the amount owed from foreign currency to rupees based on their policy.
Exchange Rate Application:
If you have a hedge contract, the rate from that contract is used to determine how many rupees you need to pay.
If you don’t have a hedge contract, the bank’s current bill-selling rate is used.
For stamp duty calculations, the rate from the designated authority will be applied.
By understanding these steps and how the exchange rates and interest are applied, you can better manage your import transactions and avoid any unexpected financial surprises.
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