Analytical Commentary with Legal Interpretation and Compliance Advisory
In today’s globally integrated commerce, many Indian suppliers invoice foreign clients for goods that are ultimately delivered to Indian locations
While GST law clearly denies export status unless goods move outside India, the receipt of foreign currency often raises a second question:
“If the payment is received in Pounds or Dollars for goods delivered within India, does it amount to a FEMA contravention?”
This is a subtle but critical intersection of FEMA, RBI Regulations, and GST Law—where a misstep in classification or documentation can expose a company to inquiries from the Directorate of Enforcement, RBI, and GST authorities simultaneously.
Let’s decode the position systematically—by law, by logic, and by compliance alignment.
Law and Interpretation
A. FEMA Framework – Regulating Foreign Exchange, Not the Trade Flow
The Foreign Exchange Management Act, 1999 (FEMA) governs all cross-border exchange of foreign currency through the following provisions:
| Section | Key Provision | Interpretation |
|---|---|---|
| Section 3(a) | Restricts dealing in foreign exchange except through Authorised Dealers (ADs). | Any remittance or receipt must pass through an AD Bank with proper documentation. |
| Section 5 | Permits current account transactions in foreign exchange unless restricted. | Trade transactions (sale/purchase of goods or services) are current account transactions and hence freely permitted. |
| Section 6(3) | Capital account transactions require RBI permission. | Not applicable here, as this is not an investment or capital movement. |
Hence, the receipt of foreign currency per se is not a violation, as long as it is routed through an AD Bank and supported by genuine underlying trade.
Definition of “Export” under FEMA Regulations
As per the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015,
“Export” means taking goods out of India to a place outside India.”
If goods remain within India (e.g., Pune warehouse), the supply does not qualify as an export either under FEMA or GST. Consequently:
-
No Shipping Bill or Export Declaration (EDF/SDF) is to be filed;
-
Realisation and repatriation requirements under Reg. 9 of the Export Regulations do not apply.
However, Regulation 3(1) of the Current Account Transactions Rules, 2000 allows Indian entities to receive foreign exchange for legitimate current account transactions.
Therefore, receiving Pounds or Dollars for a domestic sale is permitted, provided it is a bona fide trade and not structured to circumvent FEMA or tax regulations.
GST Law – Export Denied if Goods Don’t Leave India
Under Section 2(5) of the IGST Act, 2017,
“Export of goods” means taking goods out of India to a place outside India.”
Hence:
-
Delivery in Pune warehouse does not constitute export, irrespective of foreign billing.
-
The place of supply is within India (per Section 10 of IGST Act).
-
The transaction is a domestic taxable supply, chargeable to GST (either IGST or CGST+SGST).
-
Zero-rating or LUT benefits under Section 16 are unavailable.
Thus, foreign billing ≠ export classification in GST.
Analytical and Compliance Perspective
Why It’s Not a FEMA Violation
The essence of FEMA is not “where goods go”, but “whether foreign exchange dealings are bona fide and properly routed”.
If the following four conditions are satisfied, the transaction remains within legal bounds:
| Condition | Compliance Expectation |
|---|---|
| Genuineness of Transaction | The sale is real, goods delivered in India, and buyer is a bona fide foreign company. |
| Authorised Channel | Payment received through an Authorised Dealer (AD) Bank with full SWIFT/FIRC documentation. |
| Proper Declaration | Bank is informed that payment is for domestic supply to a non-resident (not export). |
| No Circularity | The remittance does not return to the payer or related parties (no round-tripping). |
Hence, the foreign exchange inflow is a permitted current account receipt, not a FEMA contravention.
Why It’s Not an Export for GST
GST operates on “place of supply”, not on “payer’s location”.
Since goods never leave India, the supply cannot be treated as export, even if:
-
Invoice is in foreign currency,
-
Payment is received in Pounds, or
-
Buyer is a foreign company.
The supplier must issue a domestic tax invoice, charge GST, and disclose it as B2B domestic supply in GSTR-1.
Any attempt to classify this as zero-rated export would invite tax demand, interest, and penalty.
Documentary Compliance Checklist
| Aspect | FEMA Compliance | GST Compliance |
|---|---|---|
| Invoice | Mention billing in foreign currency; note “Supply within India – not export.” | Show taxable value in INR and charge IGST or CGST/SGST as applicable. |
| Banking Proof | FIRC / SWIFT / AD Bank certificate (clearly marked as current account receipt). | Not applicable for export realisation but must match accounting trail. |
| Contract / PO | Must mention delivery in India and currency of payment. | Helps establish place of supply. |
| Declaration to Bank | Clarify to AD Bank that it is “domestic sale to non-resident.” | Avoids automatic tagging as “export proceeds.” |
Critical Caution Points
-
Misclassification Risk:
Wrongly tagging the transaction as export in GST or FIRC may lead to mismatches between bank data, customs, and GST returns. -
Round-Tripping / Money Laundering Exposure:
If the buyer or its Indian warehouse is connected to the seller, regulators may examine it for layering or parking of funds under FEMA Section 3(b) and PMLA. -
Permanent Establishment (PE) Risk:
If the UK buyer controls inventory or warehouse in India, it may be deemed to have a PE under Income-tax Act, making its profits taxable in India. -
Audit & Reporting:
Tax auditors must disclose such foreign-currency domestic receipts under Clause 44 of Form 3CD and ensure alignment across GST, Income-tax, and FEMA documentation.
Conclusion and Professional Advisory
The receipt of foreign currency for domestic supply is not a FEMA violation, provided:
-
It is a genuine current account transaction,
-
Routed through an Authorised Dealer, and
-
Correctly documented as a domestic taxable supply under GST.
However, it is not an export either — hence, zero-rating, export incentives, or relaxed realisation timelines do not apply.
Misrepresentation, however innocent, may invite inquiries from both RBI and GST departments.
Professional Advisory – Best Practice Protocol
-
Route all remittances through AD Bank with a written declaration of domestic nature.
-
Align all ledgers and returns—GST, Income Tax, and FEMA—to avoid interpretational mismatch.
-
Train internal teams to distinguish between “foreign billing” and “export classification.”
-
Document defensively—maintain contracts, delivery proofs, FIRCs, and AD Bank correspondence for 8 years.
-
Take periodic FEMA health checks through internal audit or CA certification.
Closing Insight
FEMA’s intent is transparency, not prohibition.
GST’s intent is correct taxation, not foreign exchange control.
When both are understood harmoniously—
foreign receipts for domestic supply remain fully compliant, provided they are truthful, traceable, and tax-paid.
