Clearing the confusion on – SOFTEX form filing need

May 14, 2016 - By Sudhir Singh

There are instances, when Software exporting companies operating outside an export oriented scheme (STP, SEZ, EOU etc.) are advised, that there is no need for them to file SOFTEX forms. The young entrepreneurs in Startups, obviously get confused on this. In some cases, companies stopped getting SOFTEX certification done, after complying in past when they moved out of STP/SEZ schemes, owing to this advice.

There are always two parts to deal with regulatory compliance. One, the policy aspect and second, the procedural aspect. There is lot of material available on internet, on the procedural (process) part of filing SOFTEX form. And perhaps none, that explains the policy aspect.

This article is meant to clear the confusion on SOFTEX form among the Software product community by explaining the policy aspect of SOFTEX and background process, in the realm of foreign trade regulations.

Why and how SOFTEX form came in to existence?

In general exports means sending ‘goods and service’ to clients in foreign country (outside territorial borders of India) for purpose of sale. Physical goods are exported through a physical port of shipping (a sea port, airport or foreign post office) monitored by Central customs department.

When physical goods leave borders, from any port of shipment, the exporter is required to declared value of goods. In India, this was done through a form called GR form (PP form in case of exports by post office) for non-EDI ports and SDF for EDI ports, along with invoice and other supporting documents. Recently, as part of simplification of process, the GR and PP form have been substituted by a new form called ‘EDF’ (export declaration form) and SDF has been merged with shipping bill. Please see RBI circulars. RBI/2013-14/254 A.P. (DIR Series) Circular No.43 September 13, 2013) and RBI//2014-15/599, A.P. (DIR Series) Circular No.101, May 14, 2015.

This value declared is required to be accepted and certified by the customs office, at the port of shipment. This is called “valuation of export”. Once the valuation of export is complete, the value is accepted both by RBI and its authorised dealer (the exporter’s bank). RBI then monitors, the remittance of an equivalent value in exporter’s bank account.

A ‘Software’ exported on a media (CD/DVD, magnetic tapes etc.) has to pass through these steps, as it is exported physically through a port of shipment, as physical goods.

In early 1990s, when Software Technology Park (STP) scheme came in to existence, the need to export Software through data communication links emerged. Customs department had difficulty in managing this, as nothing physical was visible in a Software transmitted, as well as did not have human resources and knowhow to deal with exports through telecom links.

DeitY (then Department of Electronics) enabled an innovation in government policy and could get RBI to announce SOFTEX form as an alternative to the GR/PP forms, to suit the export of Software, through data communication links.

STPI being the administrative authority of STP scheme, became the designated authority for “Software export valuation” and certification of SOFTEX form, in place of Customs. As on date the jurisdictional STPI Directors and SEZ Commissioners are the designated authority for SOFTEX valuation.

The purpose, policy and process of SOFTEX form is same as in GR/PP (or new EDF) form.

The only policy point difference between GR/PP or EDF form and SOFTEX form is that GR/PP forms are submitted and valued, simultaneous to the exports actually happening from port of shipment. Whereas, SOFTEX form is a post-facto approval, after the actual export of Software has actually taken place.

An important policy aspect to understand here is that before the SOFTEX form was launched the Software was put at par with ‘goods’ in the foreign trade policy, as policy makers could not conceive a trade in anything that is not ‘goods’. Even today, a services export in non-IT sector does not need any declaration or export valuation. Therefore, Software (IT and ITeS) was given a special status in international trade equivalent to ‘goods’.

Valuation of exports by Customs/STPI/SEZ is a crucial part of process

As described above, there are two policy aspects embedded here,

  1. Regulation of foreign remittances by RBI against export done by exporter (the origin of this procedure and policy behind lies in the name of GR form – “Guaranteed Remittance”) and
  2. Valuation of export done by Customs officials at port of shipment (by STPI/SEZ for SOFTEX)

The second part of the process is “valuation of exports”. Exporter declares the value of exports supported by relevant documents. The designated officer in customs/STPI/SEZ considers and certifies this value and has all right to reject the value declared or examine any declaration for overtly undervaluation or overvaluation. The process is very smooth and in more than 99.9999% cases the value is accepted and certified. Rejections are only subject to a real doubt, unlawful trade happening and exporter not able to justify genuine exports. The valuation is done under the Customs Valuation (Determination of Value of Export Goods) Rules. Since there is no separate rules defined for ‘Software’ and the export oriented units (STP, SEZ, FTZ, EPZ) operate under customs bond, the same rule applies to ‘Software’. In absence of a rule for non-EOU exporters the law would rely on same rule as well.

An export of goods and software without valuation is incomplete. RBI depends on designated officers for this valuation exercise as they are the ones who have delegated powers under the constitution to do so.

A form not certified by jurisdictional designated officer is incomplete, legally.

Who should not file EDF or SOFTEX?

An exporter of physical goods has no option other than filing EDF, as goods passes through the port of shipment managed by customs. Similarly, exporter registered under STP and SEZ has no option as the value to be accounted as exports by exporter is taken from the SOFTEX forms signed in name of the exporter.

Exporters of Software (both IT and ITeS companies) not registered in STP or SEZ (or other EOU schemes) scheme should also file SOFTEX, as per foreign trade policy.

Such exporters popularly called non-STP units can file for SOFTEX with jurisdictional STPI Director.

Only those exporters whose exports are not goods or Software can escape the filing of SOFTEX. The foreign remittances received as exports proceeds, without certification of EDF (replacement of GR/PP form) or SOFTEX form will fall in two categories, either a general service or an unlawful remittance.

Exports of services that do not fall under IT and ITeS category are exempted from filing the export declarations and certification required thereof.

What is covered under the term ‘Software’ in RBI circular

The RBI circulars on SOFTEX mentions exports of ‘Software’. It implies both IT and ITeS exports. The genesis lies in how foreign trade policy evolved, ever since STP scheme was added to the bandwagon of export oriented schemes.

‘IT’ covers both Software services and Software products (including SaaS). Software services is a whole lot of things from consulting to design, development, implementation, maintenance, re-engineering of Software or a Software product.

‘ITeS’ covers all those services that are delivered to clients across borders of India using an IT driven system and process over a telecom/internet link (include BPO, KPOs, Digitization, Call centers, Data processing etc.).

What happens if exporter does not file SOFTEX (or alternative EDF) form?

If SOFTEX (or EDF in case of physical exports) form is not filed, and exports proceed is realized, the remittance received is either treated as ‘general services’ or not as an export proceed or illegal.

For general services such as management consulting, technical services there is no declaration form.

Advice for Software product including SaaS companies

For Software exporting companies not operating under STP or SEZ, it is possible to bypass and get remittances without filing SOFTEX or EDF, under the guise of a ‘service’ export. There is no immediate threat of non-compliance, unlike the exporters in STP or SEZ.

However, not getting classified as ‘software’ can create problems in future. First problem created is your exports are not ‘Software exports’. The other problems can erupt from regulations in other areas of taxation etc. Complex Service tax rules can create problem. Any situation, where an exporter will need to prove and protect herself can end up in to a nightmare.

The important part here is the export valuation process by STPI, SEZ or Customs. Once EDF/SOFTEX form is certified, your export is also certifies as export of ‘Software’, under foreign trade policy.

For Software product companies including SaaS companies, is it advisable to mandatorily file SOFTEX form or and EDF form for Software product export in physical media, even when they are not part of STP, SEZ or similar schemes.

iSPIRT efforts in further liberalization of SOFTEX \EDF

Many argue, why this documentation. The need to declare export value, monitor foreign remittances, export valuation and balance of trade & payment accounting will not vanish for a nation state. There has to be some minimal documentation and process to fulfil all these needs.

However, there is scope for further liberalization and need for an easy liberal regime for ‘ease of doing business’.

iSPIRT is aiming for a 100% “Digital” SOFTEX and EDF run under aegis of RBI, where the process can be executed and compliance completed even at single invoice level or a monthly consolidated statement level, based on various practical needs, with export declaration fully ‘dematerialised’.

This is much needed for a ‘digital economy’ and can be a boon for exporters especially in SaaS segment and startups, where orders and invoices are generated online. And online interface can be extended in to a fully ‘digital’ export declaration regime of RBI.

India to progress to a Product Nation, in a digital world, has to take some of these steps. Sooner the better.

22 thoughts on “Clearing the confusion on – SOFTEX form filing need

  1. Frustrated Indian says:

    All services, including IT/ITeS should be merged back into one general services category now.

    The only reason to give ‘special’ attention to IT/ITeS with STPI/Softex forms was because there was a huge incentive to falsely declare other services as IT/ITeS to get the 100% income tax exemption for such exports.

    Special attention to Software was not a policy ‘innovation’ or ‘liberalization’. It was a ‘verification check’ added to prevent misuse of a government scheme.

    Now with that benefit gone, there is absolutely no reason for anyone to wrongly classify their exports as IT/ITeS services vs any other available options. The Softex and STPI should be abolished as they serve absolutely no purpose anymore. All services should be merged back into one general category.

    And has anyone looked at the stupid STPI rates for Softex forms for Non-STPI units? It is upto 1% of revenue (not 1% of profits, it is 1% of revenue). And it is exactly same as the rate for full STPI membership. If a company is running at 10% profit margin, STPI will get 10% of their profits just for rubber-stamping the invoices. There is absolutely no way they can justify this. Does it cost the same to get customs valuation done for physical exports? Maybe its because Software has a more ‘liberalized’ and ‘innovative’ policy.

    The online/digital filing is just an excuse to keep STPI around when it no longer needs to exist. Look at their website – their goal is to provide high-speed data link services? It is not 1990 anymore. Every college kid has a high-speed internet connection on their phone.

    And it is a famous joke that you probably already know, the 2013 RBI circular in which they ‘removed’ the Softex exemption for invoices less than $25,000 was titled “Simplification of…” (RBI/2013-14/254).

    All services, including IT/ITeS should be merged back into the general services category now. That would be the right thing to do, not 100% digitization of something thats not needed anymore.

    (My special thanks to iSpirt for at least looking at the STPI/Softex mess, as iSpirt is probably the only way to get our voices heard).

    1. Rakshit Verma says:

      In addition to above, I am unable to trace any authority such as rule, regulation etc. which requires IT/IT enabled service providers located outside STP to files SOFTEX Form. Except FAQs issued by Nasscom and certain other authorities, no reference of any section, rule has been made which requires non-STPI units to file SOFTEX form while providing IT/IT enabled services. Please enlighten me if there is any. The FAQs issued by NASSCOM refers three RBI Circulars, however, they only talk about requirement of filing of SOFTEX Form in case of export of software which is defined under Rule 2 (viii) of Foreign Exchange Management (Export of Goods and Services) Regulations, 2000. Thus, according to me for NON-STPI Units, there is no requirement of filing of SOFTEX Form in case of export of IT/IT enabled services.

  2. sureshsambandam says:

    I agree with comments posted below. STPI should be shutdown and softex form abolished as there is no STP benefit

  3. Frustrated Indian says:

    This should be presented as what it is, a 10% STPI tax.

    #0) Why? So that they can give us data-links (LOL, every college kid has a datalink in their phones) and promote entrepreneurship (think of all the small town entrepreneurs not in same city as STPI office, traveling overnight for this nonsense twice a month and feeling grateful for how STPI is ‘helping’ and ‘promoting’ them).

    Why should they not incorporate in Singapore? It costs less and takes less effort.

    #1) In meetings with RBI, iSpirt should push for abolishing for Softex (merging with general services). For balance of payment estimates, exporters can be asked to give a quarterly guidance of outstanding remittences to Authorized Dealers (Banks). Maybe along with copies of invoices, but this doesn’t serve any practical purpose for RBI other than ‘fishing expeditions’ or “Lets ask for it, because we can”. At the very least, ask RBI what they have done with this information in last 5 years after STP scheme has closed. We deserve to know that all the effort and money we are putting in this is being put to good use and how.

    In any case, only outsourcing firms will have such invoices. Most product/digital/sass firms wont have any such pending invoices so there is no balance of payment information that RBI can expect from them.

    #2) In meetings with STPI, iSpirt should push for rationalizing of STPI rates and very soon STPI itself will start pushing for softex forms to be abolished. STPI’s cost structure is designed for body shops charging $25/hour from clients and paying a salary of 20-70k per month to employees here. Such companies with more than 50% profit margin might be able to cope with STPI tax and they have sufficient ‘fat’ of HR/Accounting/Bench staff that they can have person visit STPI as often as needed. But for product/digital/sass companies selling items for $1 to $20 each and modest 10-15% profit margins this feels like extortion. And think of the startups making loss in there first few years but still having to pay the STPI tax. A revised STPI cost structure with per invoice charge of, say, Rs 10 will still be too expensive for such firms (15% of revenue). Maybe it can be something like 1% of invoice or Rs 10 per invoice, whichever is lower. Lets see if STPI and RBI still see ‘value’ in softex forms after the cash value is gone.

  4. Equally_Frustrated_Indian says:

    I am totally in sync with the views of ‘Frustrated Indian’ to abolish this so called SOFTEX nonsense. Apart from the huge cost and wasted time visiting their offices, it seems like a pointless exercise of astronomical proportion. Anyone who has dutifully visited STPI Bangalore, month on month to file SOFTEX will understand how inefficient the whole system is. It is such a shame that we allow it to exist in its current form. And in a digital push, they still insist on paper forms and bundles of it. And added to this, submission of CD’s. I doubt this kind of laughable nonsense exists anywhere on this planet.

  5. Frustrated Indian says:

    Its the same nonsense at NOIDA STPI, just another “rent seeking” center asking for their ‘fair cut of revenue’ for allowing us the ‘privilege’ to do business in Modi’s India. Reminds me of the environment ministry tax – that Modi called the Jayanti Natrajan tax under UPA.

    Current STPI digital push doesn’t has entrepreneur’s ‘ease’ anywhere in the policy or intention, its the same joke as the RBI circular with title “Simplification of…” and inside they removed exemptions for small companies. STPI has just reduced their own data entry work by asking us to submit the CDs – simply passing ‘additional’ burden on to us to ease their own job. Someone needs to file an RTI to get details of how they are ‘using’ all the money they get for this, and all the money that they must be spending now under the garb of digitizing this unnecessary process. Thats our hard earned money going down the drain.

  6. Are you guys also paying a yearly service fee and registration fee to STPI just for getting the Softex form certified? I don’t understand the high fees for a very simple or useless benefit!

  7. hi , still there is a confusion ,
    “‘IT’ covers both Software services and Software products (including SaaS). Software services is a whole lot of things from consulting to design, development, implementation, maintenance, re-engineering of Software or a Software product”

    if we raise invoice for the resources who work for the client as a T&M model , is it comes under this catagory and do we need to produce the softex certificate , can you guys clarify

    1. If you are using the T&M resources for an export that falls under Category “software” you need to file a SOFTEX form.

    2. Sudhir Singh says:

      if your T&M leads to an export that is “Software” (IT or ITES) the SOFTEX form applies to you. The Risk of not filing SOFTEX forms is also described in the blog. That is the loophole some uses, but then you should understand the RISK.

  8. Hari Krishnan says:

    SOFTEX forms and its submission is ridiculous and this can happen only in our India.
    Pages and pages has to be written by very small companies like us with only developers.

    Not to mention visiting their offices or sending it by mail, submitting monthly, quarterly and annual reports and occasional surveys. Just kill us already.

    A monumental waste of paper and man hours that could have been used for something productive. sigh! What is NASSCOM and other such orgs doing?

  9. mithiljadhav says:

    We are a small startup selling mobile apps on Google Play Store and App Store which results in inward remittances. Is it necessary to file the SOFTEX for just a small chunk of revenue in initial days?

    Can anyone throw some light on this?

    1. The blog is clear on this aspect. As per existing provision, if you want your export be categorized as “Software” and your inwardremittance is under this category then SOFTEX form needs to be filed. The risk of not filing the SOFTEX form is also explained in the Blog.

    2. Sudhir Singh says:

      As per existing provisions if an export is to be classified as “Software” or an inward remittance received for category “software” the SOFTEX form has to be filed. There is no exemption.

      1. mithiljadhav says:

        Thank you for the reply and the clarification.

        For filing SOFTEX, there is an overhead involved in terms of annual registration fees with STPI along with the paperwork. As the threshold of $25000 has been removed, everyone needs to file SOFTEX for “software” export even if they are incurring losses. Say I am earning $500 a year via mobile apps and receiving remittance for the same. Obviously, Revenue – Expenses = Negative profit in early days of the venture. I think the SOFTEX does not make sense for this kind of marginal revenue. There should certainly be a threshold so that startups benefit from the “ease of doing business” in the mobile apps and SaaS world.

        100% “Digital” SOFTEX which iSPIRIT is aiming at sounds much needed, which I think would encourage compliance as well as promote the “ease of doing business”.

  10. Hi, I just read this and found very helpful. I just wanted to be sure on the remittance regularization process ask by AD. We already submitted the export documents with STPI noida and received the Softex form. Now bank(AD) has asking to submit the same document to regularize the remittance. both process involved charges. Kindly advise if we still required to go through the process of remittance regularization?

  11. Mukunth Venkatesan says:

    Hi we used be an STPI unit from 2000 to 2016. But there was a circular by RBI in 2004 that any export that is less than 25,000$ need not be declared via softex. so we did not submit softex for invoices below 25k$. do you know of any method to regularize this?

  12. STPI should have been closed when the income tax exemption scheme expired half a decade ago. Verification of invoices serves absolutely no purpose now. Even without STPI verification it is legal money coming in via legal bank channels for a legal purpose without any scope of tax evasion – money is already in company bank account.

    Only people from STPI claim that it is super important – but they have vested interest in collecting all these fees for blind rubber stamping of the invoices, and they don’t even do that on time.

  13. Monil Hathi says:

    Do we need to file Softex even if we provide IT services to Indian clients only? Also, do we need to file if there are no remittances from outside India?

  14. Dr Manoj Verma says:

    Please inform if information about ‘Tenders’, ‘Projects’, ‘Contract Awards’, ‘Procurement News’ etc. processed/classified, compiled on a website, and if offered to overseas clients by charging in foreign currency under Subscription.
    1. Would it be considered ITeS Exports? and if SOFTEX certification will be required?
    2. Either this will also attract ‘Service Tax’?
    3. Is there any Export Incentive/Duty Drawback, or any other benefit available?

  15. After filling the quarterly return online, do we have to take the print of it and get it signed and submit the hard copy to the STPI office??

  16. Hello,
    I have recently been contracted by a foreign company to do CAD product design for them from India. I wanted to know does this kind of work fall under the topic of Software Export? I am not exporting software with code, just 3D graphics files for the company to use as a basis to create products.

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