IT companies servicing offshore clients may not often be mindful of the foreign exchange control compliances associated with such business, especially if the entity is situated outside zones demarcated for incentivising export such as software technology parks (STP) or special economic zones (SEZ) or free trade zones (FTZ). Any lapse in ensuring adherence to these stipulations could lead to such companies being penalised by the Reserve Bank of India (RBI) thereby denting their credentials and possibly impeding the company's export operations.
As per the existing legal framework, all software exports are required to be mandatorily reported in Form SOFTEX to the STP/ SEZ/ FTZ authorities. This, prima facie, may give an impression that the reporting obligation is only for those entities which are operating from these specific areas and does not extend to other entities which operate outside these delineated zones. However, such conclusion is incorrect.
Further, given that the SOFTEX reporting requirement is only applicable to software exports and not to export of 'services', it is possible that an IT company may inadvertently be categorising its exports wrongly as 'services' instead of 'software'. Nevertheless, such categorisation could fall foul of the broad definition of 'software' which means "any computer programme, database, drawing, design, audio/ video signals, any information by whatever name called in or on any medium other than in or on any physical medium" as per the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015.
The STP authorities have put in place a mechanism pursuant to which non-STP based software exporting entities must seek a non-STP registration, for the sole objective of filing Form SOFTEX. This rather anomalous registration is only for the limited purpose of facilitating this filing and the respective STP authorities have elaborated on the necessity and process associated with procuring such registration.
The initial validity of this non-STP registration is 3 years and therefore, it must be periodically renewed. It entails payment of an annual fee to the STP authorities which is linked to the exporter's annual export turnover/ contract value and ranges from INR 4,000 to INR 6,50,000. A key pre-requisite for this registration is that the entity must first obtain an importer-exporter code from the Directorate General of Foreign Trade.
Notably, besides filing of Form SOFTEX, this registration casts an additional obligation on such entity to file performance reports on a quarterly as well as an annual basis and to register all its export contracts, with the STP authorities.
If IT companies are engaged in software exports to clients overseas, then they must ensure that requisite measures are taken for obtaining this non-STP registration and filing Form SOFTEX. A common result of such lapses is that, once it is detected, the company finds itself sucked into a regulatory quagmire which consequently often leads to substantial legal expenditure, and unwanted regulatory glare.
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