Shubham Harne and Ayushi Rathore

1. Buyers Credit
 Buyer’s Credit refers to loans
for payment of imports into
India arranged on behalf of
the importer through an
overseas bank. The offshore
branch credits the nostro of
the bank in India and the
Indian bank uses the funds
and makes the payment to
the exporter’ bank as an
import bill payment on due
date. The importer reflects
the buyers’ credit as a loan on
the balance sheet.
NOTE- Nostro Account is an account of an Indian Bank with a Bank Outside India In foreign Currency.
The counter Part of It is Vostro Account, which means the account that the foreign bank has with Indian
bank.

2. Benefits of Buyer’s Credit
 The exporter gets paid on due date;
whereas importer gets extended date
for making an import payment as per
the cash flows.
 The importer can deal with exporter
on sight basis, negotiate a better
discount and use the buyers’ credit
route to avail financing.
 The funding currency can be in any
FCY (USD, GBP, EURO, JPY etc.)
depending on the choice of the
customer.
 The importer can use this financing
for any form of trade viz. open
account, collections, or LCs.
 The currency of imports can be
different from the funding currency,
which enables importers to take a
favorable view of a particular
currency . 2

3. Financing Terms
 LCs (Letter Of Credit)-: A letter from a bank
guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the
event that the buyer is unable to make payment on the
purchase, the bank will be required to cover the full or
remaining amount of the purchase.
 Collections-: A documentary collection (D/C) is a
transaction whereby the exporter entrusts the collection
of a payment to the remitting bank (exporter’s bank),
which sends documents to a collecting bank (importer’s
bank), along with instructions for payment. Funds are
received from the importer and remitted to the exporter
through the banks involved in the collection in exchange
for those documents. D/Cs involve using a draft that
requires the importer to pay the face amount either at
sight (document against payment) or on a specified date
(document against acceptance). The draft gives
instructions that specify the documents required for the
transfer of title to the goods. Although banks do act as
facilitators for their clients, D/Cs offers no verification
process and limited recourse in the event of non-
payment. Drafts are generally less expensive than LCs.
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4.  Open Account: An open account transaction means that the goods are
shipped and delivered before payment is due, usually in 30 to 90 days.
Obviously, this is the most advantageous option to the importer in cash
flow and cost terms, but it is consequently the highest risk option for
an exporter. Due to the intense competition for export markets, foreign
buyers often press exporters for open account terms since the extension
of credit by the seller to the buyer is more common abroad. Therefore,
exporters who are reluctant to extend credit may face the possibility of
the loss of the sale to their competitors. However, with the use of one or
more of the appropriate trade finance techniques, such as export
working capital financing, government-guaranteed export working
capital programs, export credit insurance, export factoring, the
exporter can offer open competitive account terms in the global market
while substantially mitigating the risk of nonpayment by the foreign
buyer.
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5. Buyers Credit Process flow
 Indian customer imports the goods either under DC / LC, DA / DP or Direct
Documents.
 Indian customer requests the Buyer’s Credit Consultant before the due date of
the bill to avail buyers credit finance.
 Consultant approaches overseas bank for indicative pricing, which is further
quoted to Importer.
 If pricing is acceptable to importer, overseas bank issue’s offer letter in the
name of the Importer.
 Importer approaches his existing bank to get letter of undertaking /
comfort (LOU / LOC) issued in favour of overseas bank via swift. A Letter of
Comfort is a letter issued to lending institution by a parent company
acknowledging the approval of a subsidiary company’s attempt for financing.It
doesn’t guarantee the loans approval for the subsidiary company.
 On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU,
will either funds existing bank’s Nostro account or pays the supplier’s bank
directly
 Existing bank to make import bill payment by utilizing the amount credited (if
the borrowing currency is different from the currency of Imports then a cross
currency contract is utilized to effect the import payment).
 On due date existing bank to recover the principal and Interest amount from
the importer and remit the same to Overseas Bank on due date.
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6. Cost Involved
 Interest cost: This is charged by overseas bank as a financing cost.
Normally it is quoted as say “3M L + 350 bps”, where 3M is 3 Month,
L is LIBOR, & bps is Basis Points (A unit that is equal to 1/100th of
1%). To put is simply: 3M L + 3.50%.
 One should also check on what tenure LIBOR is used, as depending
on tenure LIBOR will change. For example as on day, 3 month
LIBOR is 0.33561% and 6 Month LIBOR is 0.50161%
LIBOR
The London Interbank Offered Rate is the average interest rate estimated by
leading banks in London that they would be charged if borrowing from other
banks. Libor rates are calculated for ten currencies and 15 borrowing periods
and are published daily at 11:30 am. LIBOR initially fixed rates for three
currencies. (London time) by Thomson Reuters. Australian dollar (AUD),
Canadian dollar (CAD), Swiss franc, Danish krone (DKK), Euro (EUR), British
pound sterling (GBP), Japanese yen (JPY), New Zealand dollar (NZD), Swedish
krona (SEK), U.S. dollar (USD).Current LIBOR Rate is
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7.  Letter of Comfort / Undertaking: Your existing bank
would charge this cost for issuing letter of comfort /
Undertaking
 Arrangement fee: Charged by Buyers Credit Agents /
Brokers how is arranging buyer’s credit for you.
 Other charges: A2 payment on maturity, For 15CA and
15CB on maturity, Intermediary bank charges etc.
 Withholding Tax(WHT): The customer has to pay WHT
on the interest amount remitted overseas to the Indian tax
authorities. (The WHT is not applicable where Indian
banks arrange for buyers credit through their offshore
offices.)
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8. CONCEPT OF WITHHOLDING TAX
 It Is a Tax levied on the interest paid by
the Indian corporates to overseas lenders
on the loans taken from them. Tax paid is
the additional cost that needs to be borne
by the borrower.
 Withholding Tax is paid as per Income
Tax Act, 1961 which varies from country to
country as per DTAA (Double Taxation
Avoidance Agreement) between India
and the lender’s country. There 83
countries where India has DTAA. One of
the condition to use DTAA rate is that
lending institution should have an
Indian Pan Card. 8

9. WITHHOLDING TAX IN DETAIL
 It is not unusual for a business or individual who is resident in one
country to make a taxable gain (earnings, profits) in another. This
person may find that he is obliged by domestic laws to pay tax on that
gain locally and pay again in the country in which the gain was made.
Since this is inequitable, many nations make bilateral double taxation
agreements with each other. In some cases, this requires that tax be
paid in the country of residence and be exempt in the country in which
it arises. In the remaining cases, the country where the gain arises
deducts taxation at source ("withholding tax") and the taxpayer
receives a compensating foreign tax credit in the country of residence
to reflect the fact that tax has already been paid. To do this, the
taxpayer must declare himself (in the foreign country) to be non-
resident there. So the second aspect of the agreement is that the two
taxation authorities exchange information about such declarations, and
so may investigate any anomalies that might indicate tax evasion.
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10. Treaties :Interest Clause(WHT)
 USA:(a)10 per cent of the gross amount of the interest if such interest is paid
on a loan granted by a bank carrying on a bona fide banking business or by a
similar financial institution (including an insurance company) ; and
 (b) 15 per cent of the gross amount of the interest in all other cases.
 Uk : 10% if interest is paid to a bank; 15% for others
 Singapore: 10% if interest is paid to a bank; 15% for others
 Mauritius: As per Double Taxation Treaty with Mauritius, withholding tax on
interest payment to Financial Institution is nil.
 When foreign bank quote for buyers credit they quote as net of withholding
tax. Thus one needs to do grossing up interest at the time of calculating WHT.
 Nil Withholding tax on Interest payment on funds arranged from Banks based
out Mauritius.
 No Withholding tax on loans raised from overseas branch of Indian bank
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11. Flow of payment of withholding tax
 First check the country from which buyer’s credit is to be made
available to finalize rate of TDS.
 Deposit the tax through challan no. 281 (nature of payment 195).
 Get Form 15CB issued from Chartered Accountant (CA) for the
buyers credit interest payment.
 Submit online Form 15CA based using form 15CB provided by
CA.
 Along with Form A2 submit Form 15CA and Form 15CB to
Authorised Dealer (AD Bank) on or before due date of making
payment for buyers credit interest.
 File Quarterly return of withholding tax through Form No. 27Q
(Section Code: 195).
 AD Bank forwards a copy of document to Assessing officer /
Income Tax Department
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12. Consequence of Non Deduction of
Withholding Tax (WHT / TDS)
 As with other TDS defaults the consequences for Non deduction
of Withholding Tax (WHT) may be broadly classified as under:
 1.As Per Sec 40(i)(a) if Withholding Tax is not paid then the
Interest paid on buyers credit will be Disallowed.
 2. Simple Interest at 12 % p.a. u/s 201A from the date on which
tax was deductible to the date on which tax is actually deducted.
The rate of Interest is 1.5 % per month or part thereof, from the
date on which tax was actually deducted to the date on which tax
is actually paid.
 3. Penalties for non deduction (u/s 271C) (Minimum Penalty is
the amount of tax which such person has failed to deduct or pay)
and failure to pay the deducted tax to the government (u/s 221)
(Minimum Penalty is any such amount as the Assessing Officer
may impose and maximum Penalty is upto tax in arrears)
 4. Prosecution u/s 276B
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13. Accounting treatment
 On Goods Being imported from the foreign countries , For
obtaining buyers credit and its payment normal Journal
Entries are passed, however When due to foreign currency
fluctuation income or loss is booked ,Following Journal
Entry Is Passed
when gain is booked
 Party A/c Dr Xxxxxx
 To Forex Gain A/c Cr xxxxxx
when loss is booked
 Forex loss A/c Dr Xxxxxx
 To Party A/c Cr xxxxxx
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14. Disclosure Requirements
 In Balance Sheet
 Buyers’ credit Taken for more than one year shall be disclosed under the head Secured
liabilities under the Subhead Sources of funds or else it should be disclosed under the
head Current Liabilities Under sources of Funds.
 In Profit and Loss Statement
 LC issuance charges, LoU issuance charges, Bank Commission is considered as expenses
as Bank Charges and Bank Interest are disclosed under the head of Finance Cost. Gain
due to Currency Fluctuation is considered as income as Exchange Gain and disclosed
under the head of Other Income.

 A. Amount and Maturity
 Maximum Amount Per transaction : $20 Million
 Maximum Maturity in case of import of non capital goods: upto 1 year from the date of
shipment
 Maximum Maturity in case of import of capital goods : upto 3 years from the date of
shipment
 Maximum Maturity in case of import of capital goods for companies classified as
Infrastructure sector: Upto 5 years from the date of shipment
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