NRB’s Consultation Paper on Payment in Foreign Exchange

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NRB’s Consultation Paper on Payment in Foreign Exchange

The proposed arrangements are expected to ease the problems Nepalis face while availing goods and services from abroad.

Introduction
Unveiling the Monetary Policy for Fiscal Year 2020/21, Maha Prasad Adhikari, governor of Nepal Rastra Bank (NRB) announced that arrangements will be made for granting exchange control facility to Nepali individuals and entities in order to effectuate online purchases of goods and services from abroad.  This commitment was made considering the increasing number of foreign exchange payments being made by Nepali individuals and entities through informal channels, especially for online advertisements on various social media platforms.  Payments made through informal channels were perceived to give rise to instances of money laundering, loss of revenue to the government and misuse of foreign exchange.  

In light of the announcement, the central bank recently released a consultation paper inviting recommendations from stakeholders regarding the draft of a circular/directive to be formulated for the purpose.

Current Provisions for Foreign Exchange Payments for Goods and Services
Currently, exchange control regulations provide limited avenues to Nepali individuals and entities to make foreign exchange payments for purchasing services from abroad.  

As per section 2(c)(7) of circular no. 15/2076 of Unified Foreign Exchange Management Circular 2076 (UFXMC), Nepali individuals who maintain bank accounts in convertible foreign currency with commercial banks in Nepal and have obtained credit or debit cards using the accounts, may purchase services from abroad up to USD 2,000 annually.

Similarly, section 9 of UFXMC no. 07/2076 states that commercial banks may provide exchange control facility to its customers for up to USD 3,000 annually for the purchase of services from abroad and may further provide exchange control facility for up to USD 10,000 on the recommendation of the regulator concerned.

Purchase of goods from abroad needs to take place through modes of banking channels such as letter of credit (LOC), trust receipts or other similar transactions.  Hence, Nepalis who are not engaged in import and trading business are generally not eligible to purchase goods from abroad directly and should therefore approach domestic retailers.

Proposed Provisions for Providing Exchange Control Facility
NRB in the consultation paper has proposed the following provisions:
•    Commercial banks may issue prepaid cards denominated in US Dollars to their customers by granting exchange control facility against Nepali Rupees linked to their accounts. Know-Your-Customer (KYC) formalities and Permanent Account Number (PAN) registrations shall be mandatory while issuing the prepaid cards.
•    Commercial banks shall be allowed to deposit up to USD 500 or equivalent foreign exchange in the prepaid cards of their customers.  Commercial banks are required to collect and deposit advance taxes applicable for purchase of services from abroad while depositing funds in the prepaid cards.
•    If a customer does not use the full limit of USD 500 in a year, commercial banks shall be allowed to top up the portion of used amount into the cards, however, not exceeding the annual limit.
•    Customers may use the limit of USD 500 or equivalent foreign currency in a year without limit on the number of transactions.
•    Customers may use the prepaid cards to purchase non-prohibited services from abroad, online.
•    Commercial banks shall be allowed to provide additional exchange control facility into the prepaid cards on the basis of necessity and justification to those customers who are able to demonstrate through documentary evidence that she/he was able to earn an income in foreign exchange at least double the amount of foreign exchange spent using the prepaid cards.
•    Commercial banks must obtain a self-declaration form from each customer seeking to obtain a prepaid card stating that she/he is not availing such facility from any other commercial bank.  A customer, who uses prepaid cards facility from more than one bank shall be subject to prosecution under Foreign Exchange (Regulation) Act 2019 BS.
•    Commercial banks shall not deposit foreign exchange in the name of another customer or in the prepaid cards belonging to others while granting the exchange control facility to a customer.

Commercial banks must submit reports to NRB on a monthly basis describing details of prepaid cards issued by them as well as details of amounts spent by the customers from the prepaid cards issued.

Preliminary Observations and Comments
The proposed provision aims to allow Nepali individuals and entities to avail limited exchange control facility to purchase goods and services online directly from foreign vendors.  As of now, Nepali entities either require a bank account in convertible currency or need to open LOC or trust receipt to avail exchange control facilities through formal and highly regulated banking channels.  By allowing prepaid cards in foreign exchange, purchase of goods and services online from foreign vendors will become easier and international markets would be more accessible.  The proposed exchange control facility will also reduce the practice of using informal channels for payment of foreign exchange abroad.  Apparently, online marketplaces and social media companies will mostly benefit from this arrangement once enforced as law.

The threshold limit of USD 500 per year to those individuals and entities who do not have an account in convertible foreign currency may seem to be appropriate from an exchange control perspective, however, this may not seem practical to those individuals and entities who already maintain accounts in convertible foreign currency.  It may be more practical as well as appropriate to allow account holders to link this facility to their credit/debit cards which are linked to their convertible foreign currency accounts and permit them to use the fund to the extent covered by their convertible foreign currency accounts in order to avoid obtaining additional exchange control approvals.  Similarly, foreign exchange issued to Nepali citizens for international travel should also be combined in the debit cards and allow them to use the funds to the extent covered by their convertible foreign currency accounts in order to have a single and efficient foreign exchange payment method.  This will not in any way burden national foreign exchange reserves.

The provision of deduction of advance taxes prior to depositing foreign exchange into the prepaid cards requires more clarification.  Since most online services require payments net of taxes, it would be appropriate to clarify that advance taxes shall be deducted from the customers’ NPR account.

Further, advance tax is payable on procurement of services only and not on goods.  Purchase of goods online will require a buyer to either clear the customs herself/himself or pay the seller in advance for the same.  Provisions relating to deduction of advance tax neither clarify on how commercial banks will deposit advance tax on purchase of services nor provide a practical mechanism where advance tax is not applicable on purchase of goods from abroad.

It can be expected that NRB will issue a circular/directive concerning the above-discussed issues.

(Devendra P.N. Pradhan is a Senior Advocate and Managing Partner and Aadittya J. Kansakar is an Associate at Pradhan & Associates.)

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