SNRR. A Critical Tool For Facilitating Cross-border Trade

The Indian Rupee (INR) continues to make significant steps towards becoming a more global currency. Whether it be the pact, last July, with UAE to pay its oil bills in INR or more recently, the Unified Payments Interface (UPI) being accepted in France, making it the first European country to do so. This allows people to make secure online transactions in Indian rupees using UPI-powered apps to scan QR codes generated on merchant websites. No small gesture then that the Eiffel Tower is the first merchant to accept UPI payments in France.

Earlier, non-residents with business interests in India were required to make and receive payments in Foreign Currency only. Now, with the benefit provided by the SNRR account, transactions can be done by non-residents having business interests in India in INR.

While initially designed for Registered Foreign Portfolio Investors (RFPIs) by the RBI, SNRR accounts were established to let RFPIs conduct transactions related to the buying and selling of securities under the Portfolio Investment scheme through Authorized Dealer (AD) Banks in India. But in 2016, the scope of SNRR Accounts underwent expansion as the RBI extended eligibility to "any person resident outside India, having business interest(s) in India." This revision allowed any person having a business interest in India to open SNRR Accounts denominated in Indian Rupees with AD Banks.

Given the above, an SNRR account is a type of current account that allows any person resident outside India (individual or corporate) to open an INR bank account with an Authorized Dealer (AD) Bank in India. The purpose of this account is to undertake certain prescribed transactions in Indian Rupees (INR). SNRR account has been notified in sub-regulation (4) of regulation 5 of the Foreign Exchange Management (Deposit) Regulations, 2016¹.

The key facts and regulations revolving around the SNRR account have been discussed in the ensuing paragraphs.

Who is eligible to open SNRR Accounts?

As per the master direction issued by the RBI for Deposits and Accounts², any person can open an SNRR account with AD bank in India for making bona fide transactions in INR provided they fulfil the following conditions cumulatively:

• The person should be a resident outside India as per the relevant laws of FEMA, and
• The person should have a business interest in India.

In case the above conditions are simultaneously satisfied by any person, then they shall be eligible to open an SNRR account in India.

What transactions are allowed to be undertaken through an SNRR account? What is included in the meaning of business interest?

RBI through an amendment³ to Foreign Exchange Management (Deposits) Regulation, 2016 expanded the meaning of business interest and provided clarity over the transactions that can be undertaken through an SNRR account. As per the amendment, apart from the transaction in the nature of generic business interest, the following transaction can also be made through the SNRR account:

Investments in India

RBI has allowed persons resident outside India ('PROI') to make investments in Indian entities through the SNRR Accounts. These investments include –

• Purchase and sale of debt and non-debt instruments by Foreign Portfolio Investors ('FPI').
• Investments in non-debt instruments by Foreign Venture Capital Investors.
• Investments in non-debt instruments by a person resident outside India in an investment vehicle.

Import and Export of Goods and Services

Payments made/received for the Import or Export of Goods and Services are allowed to be undertaken through an SNRR account provided that they are in compliance with Section 5 and Section 7 of FEMA respectively.

Trade Credits and External Commercial Borrowings

Trade credit transactions and lending under the External Commercial Borrowing ('ECB') framework⁴ are allowed to be undertaken through the SNRR account.

Business transactions by the International Financial Service Centre ('IFSC')

IFSC units are allowed to enter into business transactions (e.g. administrative expenses, INR amount from scrap sale, government incentives etc.) in INR at GIFT city through an SNRR account maintained with AD bank in India but outside the IFSC area.

All the above transactions are permitted by the RBI to be undertaken through an SNRR account provided they are bona fide and denominated in INR.

Are there any limits to the transactions

The RBI does impose specific transaction limits on SNRR accounts to prevent misuse and ensure compliance with foreign exchange regulations. These limits include:

• Maximum Balance: SNRR accounts have a maximum balance limit, which varies depending on the nature of the entity and its financial activities. Entities must ensure that their account balance does not exceed this limit.
• Transaction Caps: There are caps on the amount of money that can be transferred in and out of the SNRR account within a specified period. These caps are designed to prevent money laundering and other illicit activities.
• Reporting Requirements: Entities must report all transactions exceeding a certain threshold to the RBI and other relevant authorities. This includes providing details about the nature and purpose of the transaction.

How is an SNRR account different from a Non-Resident (Ordinary) ('NRO') account?

Both the SNRR account and NRO account are designed by RBI to facilitate ease of transaction for non-residents in India. However, these accounts are inherently different from each other and cater to different needs. The major differences between these accounts are as follows:

• SNRR account is primarily used for managing business transactions whereas NRO is primarily used to manage any income earned from India.
• SNRR is a repatriable account whereas NRO is not a repatriable account.
• SNRR is a non-interest earning account whereas NRO is interest bearing account.
• SNRR can be only opened as a current account whereas NRO can be opened as a current, savings, recurring, and fixed deposit account.

Some points for consideration

A few points to keep in mind before opening an SNRR account with AD bank

• A separate SNRR account can be opened for each different business transaction undertaken by the person. However, the AD bank may maintain a single SNRR account, if the said AD bank is able to identify and categorise the transactions.
• Inter-SNRR account transfers are permitted within the different accounts of the same person.
• The transaction in the SNRR should be related to business.
• Since the SNRR account is a current account only, therefore no interest income is earned on the balance lying the said account.
• The SNRR account is valid for a maximum period of 7 years or tenure of the contract/project (whichever is lower). However, approval for extension may be granted by RBI on making an application. No extension is required to be obtained if only permitted transactions (as mentioned above) are undertaken.
• Transfer of balances from the NRO account to the SNRR account is not permitted.
• Balances maintained in the SNRR account are repatriable.
• Any domestic credits and overseas debits into and from the SNRR account shall require the furnishing of Form A2 to the AD bank.
• AD banks shall ensure compliance with applicable regulations to the SNRR account.
• Taxes shall apply to SNRR transactions as they would apply normally.
• Pakistan and Bangladesh residents require prior approval of RBI before opening an SNRR account.
• SNRR account shall be converted into a 'Resident Rupee Account' if the account holder becomes a resident in India.
• In case of the death of the account holder, the amount due/payable on the SNRR account shall be transferred to the NRO/ NRE account of the nominee or can be remitted through normal banking channels.
• No SNRR account holder can use the account to make available foreign exchange to a resident in India in exchange for INR.

Cases where SNRR accounts are beneficial for the non-residents.

• Foreign entities obtaining income tax refunds.

There have been several cases where non-residents who do not have any physical presence in India receive income from India. These incomes include fees for technical services, royalties, etc. Taxes are being deducted from this income according to the provisions of the Income Tax Act, 1961, even though, in reality, this income may not be taxable in India or may be taxed at lower rates on a gross basis.

We have seen that earlier the companies used to chase the income tax authorities for multiple years to get their income tax refunds processed. However, due to the inability of CPC to process the refund to a bank account outside India, the refunds of the companies used to pile up for multiple years. But now, with the help of the SNRR bank account, foreign companies can get the refund processed from CPC within 10-15 days from the account opening (after the refund determination by the income tax department).

• Foreign entities undertaking turnkey projects in India.

India has been growing in terms of GDP as well as in terms of its infrastructure. Most of the turnkey projects in India require expertise knowledge and experience which is majorly possessed by foreign entities. Given the same, the turkey projects are generally being awarded and executed by an Unincorporated Joint Venture ('UJV') between a foreign entity and an Indian entity.

Earlier, foreign entities were required to establish project offices (as regulated by RBI) in India to execute the said projects awarded to UJVs. Now, with the introduction of the SNRR account, foreign companies can execute projects without establishing a project office in India. This allows for seamless remittance of project funds and profits through SNRR accounts.

Given the above, we may conclude that the SNRR bank account has helped companies who have business interests in India to do business more easily and conveniently. We have practically seen that foreign companies have bagged contracts in India worth thousands of dollars and done the entire operations through the SNRR bank account seamlessly. These relaxed provisions of the SNRR bank account show the intention of the government to ease the process of doing business in India.

Benefits of SNRR Accounts

SNRR accounts provide a range of benefits for foreign entities engaged in financial activities in India. These benefits include:

• Repatriation of Funds: One of the significant advantages of SNRR accounts is the ability to repatriate funds to the entity's home country. This ensures that earnings and profits can be transferred seamlessly, reducing the complexities associated with cross-border transactions.
• Tax Benefits: SNRR accounts may offer tax benefits, depending on the entity's home country and its tax treaties with India. These benefits can include reduced tax rates on certain types of income, exemptions, and other tax incentives.
• Holding Funds in Indian Rupees: SNRR accounts allow foreign entities to hold funds in Indian Rupees, reducing the need for frequent currency conversions. This can help mitigate the impact of currency fluctuations and simplify financial transactions.
• Convenience and Security: SNRR accounts provide a secure and convenient way to manage Indian income and investments. By centralizing financial transactions in one account, entities can streamline their operations and ensure compliance with Indian regulations.

Conclusion

In conclusion, SNRR accounts provide a secure and efficient way for foreign entities to manage their financial transactions in India. By adhering to RBI regulations, understanding the benefits and risks, and seeking professional guidance, entities can optimize their financial outcomes and ensure compliance with Indian laws. As the Indian market continues to grow and evolve, SNRR accounts will remain a critical tool for facilitating cross-border trade, investment, and financial activities. Stay informed, stay compliant, and leverage the advantages of SNRR accounts to achieve your financial goals in the Indian market.

Footnotes

1 Foreign Exchange Management (Deposit) Regulations, 2016, Notification No. FEMA 5(R), 2016-RB, dated 01^st April 2016 (as amended from time to time)

2 RBI/FED/2015-16/9, FED Master Direction Number 14/2015-16 dated 01^st January 2016 (as amended from time to time)

3 Notification No. FEMA 5 (R)/ (3)/2019-RB dated 13^th November 2019

4 Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, as amended from time to time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.