The trigger for this topic is a question that a reader asked:
We have a processing facility of granite. Can we use buyers credit for consumables (our banker refusing for consumables). As per them only raw material is allowed for buyer credit
To answer the above question one needs to understand both RBI Policy and Foreign Trade Policy.
As per RBI Master Circular: External Commercial Borrowing and Trade Credit 2015
AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment).
AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.)
As its is clear from the above extract that RBI has allowed buyers credit on import of all non-capital goods permissible under Foreign Trade Policy upto 1 year. Non Capital goods are like Raw Material, Consumables, Accessories, Spares, Components, Parts etc.
Foreign Trade Policy (FTP)
Above circular also states ” imports permissible under the current Foreign Trade Policy of the DGFT”. Refer below extracts from FTP:
Chapter 2 of FTP
2.1 Exports and Imports shall be free, except where regulated by FTP or any other law in force. The item wise export and import policy shall be, as specified in ITC (HS) notified by DGFT, as amended from time to time
2.16 Capital goods, raw materials, intermediates, components, consumables, spares, parts, accessories, instruments and other goods, which are importable without any restriction, may be imported by any person.
Definition: “Consumables” means any item, which participates in or is required for a manufacturing process, but does not necessarily form part of end-product. Items, which are substantially or totally consumed during a manufacturing process, will be deemed to be consumables.
It is clear from above extracts that Consumables are permissible for import as per FTP.
RBI has classified imports into Capital goods and Non Capital goods for Trade Credit perspective. Buyers Credit can be taken against import of Consumable as it falls under Non Capital goods import and import of same is allowed as per FTP. This conclusion also stands true for all non capital goods import.