FEMA write for consulting services rendered to a foreign company

Hi Mahesh,

Writing off receivables related to services rendered to a foreign company under FEMA is indeed a nuanced issue since FEMA doesn't explicitly mention provisions for “write-offs” like the Income Tax Act.

Here’s a structured approach and important considerations:

1. Nature of the Transaction & Contract

• Since this is consulting/service fees from a foreign entity, the amount due is a trade receivable in foreign exchange.

• The foreign principal has agreed to not pay due to losses and incomplete services.

• You want to write off this amount from your books.

2. FEMA Compliance and Write-off

• FEMA does not explicitly prohibit or regulate write-offs of receivables. The Act primarily regulates foreign exchange transactions, remittances, and repatriations.

• However, write-off of foreign receivables should be done with caution, ensuring it does not conceal foreign exchange violations.

• Since the amount was never received, you are not holding any unaccounted foreign exchange.

3. Recommended Actions

• Documentation:

  • Keep a formal written agreement or settlement letter from the foreign client acknowledging the waiver/write-off.

  • Maintain board resolutions or internal approvals regarding this write-off.

  • Record this clearly in your accounting records.

• Reporting to RBI/FEMA:

  • Generally, no prior approval from RBI is required to write off such receivables.

  • However, if the amount is large and material, it’s prudent to disclose this in your Annual Foreign Liabilities and Assets (FLA) return.

  • If your entity files FLA returns, mention the write-off in the notes.

• No forex inflow/outflow:

  • Since the amount was never realized, there is no forex inflow or outflow.

  • Therefore, no remittance or foreign exchange violation occurs from this write-off itself.

4. Tax & Accounting Impact

• For tax purposes, consult your CA if you want to claim the write-off as a bad debt.

• Make sure to follow Indian Accounting Standards for provisioning and write-off.

5. Potential Issues

• If RBI suspects that the write-off is an attempt to hide forex or circumvent FEMA, they may enquire.

• Proper documentation and transparency protect you against such issues.

Summary

• Writing off foreign receivables is allowed with proper documentation and approvals.

• No RBI/FEMA prior approval required.

• Disclose in FLA returns if applicable.

• Keep proper audit trail.