Exim Bank LOC ₹4,850 Cr Maldives 2026 - Export Tax Impact

What Happened?

On September 23, 2026, the Reserve Bank of India issued a formal circular notifying all Category-I Authorised Dealer Banks about a new Government of India-backed Line of Credit (LOC) worth ₹4,850 crores extended to the Government of the Republic of Maldives. This agreement, signed on July 25, 2025, became effective from August 27, 2026, and is designed to finance various developmental projects in Maldives through export of eligible Indian goods and services. The facility permits Indian exporters to supply goods, works, and services with at least 75% sourced from India, while up to 25% can be procured internationally.

Background & Legal Context

This Line of Credit operates under the Foreign Exchange Management Act (FEMA), 1999, and is governed by RBI's directions issued under sections 10(4) and 11(1) of FEMA. However, for Indian taxpayers, this creates important intersections with the Income Tax Act, 2025, and GST law.

Key Legal Framework:

• Section 9 of Income Tax Act, 2025: Governs income arising from foreign sources. Any profit earned by Indian exporters from supplies under this LOC will be taxable in India as per Section 9, as the exporter is a resident of India and the income originates from foreign business operations.
• Section 2(47) of Income Tax Act, 2025: Defines "income" broadly to include profits from business, profession, and investments. Export proceeds under this LOC qualify as business income.
• Section 44AB of Income Tax Act, 2025: Requires maintenance of books of accounts for all business persons with turnover exceeding specified limits. Exporters under this LOC must maintain detailed records of all transactions, export invoices, and foreign exchange realizations.
• Section 194E of Income Tax Act, 2025: Provides for Tax Collected at Source (TCS) at 0.5% on foreign remittances sent abroad, though this may not directly apply to LOC exports as they represent supply of goods/services rather than remittance of funds.
• IGST on Exports: Under GST law, exports of goods and services are zero-rated, meaning no GST is charged on the outward supply. However, exporters must follow prescribed procedures to claim refund of Input Tax Credit (ITC) on inputs used.

What Does This Mean for You?

For Indian Exporters:

Taxation of Export Income: When you supply goods or services under this LOC to Maldives, the revenue earned will be taxable business income in India for AY 2026-27 and onwards. If you are an individual, partnership firm, LLP, or company engaged in export business, this income must be reported in your ITR (Income Tax Return) under the head "Profits and Gains of Business or Profession."

Foreign Exchange Compliance: All export proceeds must be realized in foreign currency and brought back to India through authorized dealer banks. Any delay in repatriation beyond 180 days may attract penal provisions under FEMA and also invite IT department scrutiny. You must maintain proper documentation of all foreign remittances using forms like LUT (Letter of Undertaking) and Advance Authorization where applicable.

GST Treatment: Supplies to Maldives are treated as exports and therefore qualify for zero GST rate (0%). This means:

• No GST charged on your invoice to the Maldivian buyer
• You can claim 100% refund of ITC (Input Tax Credit) on inputs, materials, and services used to make these exports
• GST returns must be filed separately showing export supplies in GSTR-1
• Maintain proper documentation including invoice, shipping bill, and proof of export realization

No Agency Commission TCS: The circular specifically states that no agency commission is payable for exports under this LOC. If you incur commission expenses and want to claim them as business deductions, they must be paid from your own resources or from your Exchange Earners' Foreign Currency Account (EEFC). However, such payment can only be made after realizing the full eligible value of export in foreign currency. This restriction is important for tax planning—ensure your deduction claim aligns with actual cash outflow.

Contract Documentation: Individual Credit Agreements will be signed for a minimum value of ₹500 crores each. As an exporter, you must maintain all contracts, purchase orders, invoices, shipping bills, and payment receipts. These are essential for substantiating your income in case of income tax audit or GST scrutiny.

For Banks and Financial Institutions:

If you are a Category-I Authorised Dealer Bank, ensure that all export bills are reported in the Export Declaration Form/Shipping Bill as per RBI instructions. Your TCS compliance obligations remain unchanged.

For Project Contractors and Consultants:

If you are supplying services (engineering, consultancy, project management) to Maldivian projects under this LOC, your service income is equally taxable in India. You must issue invoices without GST (zero-rated export of services), maintain separate books for project-wise accounting, and file timely GST and income tax returns.

What Should You Do Now?

1. Contact Exim Bank: Obtain complete details about the LOC, eligible goods/services, contract terms, and disbursement schedules. Understand which of your products/services qualify under this facility.
2. Update Your Accounting System: Implement a robust system to track LOC-related transactions separately. This ensures easy identification during tax audit and helps calculate correct profit.
3. GST Registration Check: Ensure your GST registration is active and updated with proper classification of goods/services you will supply. Register your business categorization as "exporter" if not already done.
4. Foreign Exchange Compliance: Open or update your Exchange Earners' Foreign Currency Account (EEFC) if you plan to hold foreign currency. Inform your bank about LOC exports so they can properly report transactions to RBI.
5. Document Maintenance: Create a compliance calendar for:
   • Quarterly GSTR-1 filing (GST returns for exports)
   • Annual ITR filing showing export income
   • Annual GST GSTR-9 (annual return)
   • Quarterly advance tax/TDS payments if applicable
6. Tax Planning: Engage a CA to review your profit margins, cost allocation, and deduction eligibility. Since LOC supplies are on credit terms with 48-month post-completion disbursement window, ensure your income recognition method (cash or accrual) aligns with tax requirements.
7. Professional Guidance: If you are already exporting under other LOCs or Lines of Credit to other countries, consolidate your compliance. Different LOCs may have different TCS, commission, and deduction rules.

Key Takeaways

• Taxability: All profit from LOC exports to Maldives is fully taxable in India under Section 9 of Income Tax Act, 2025. Report in your ITR as business income for AY 2026-27 onwards.
• GST Benefit: Exports to Maldives under this LOC attract 0% GST. File timely GSTR-1 to claim ITC refund on all input taxes paid.
• Foreign Exchange Rules: Realize all export proceeds in foreign currency through authorized dealers. Repatriate to India within 180 days to avoid FEMA penalties and IT scrutiny.
• No Commission TCS Relief: Agency commissions, if any, must be paid from your own resources post-realization of export value. Claim these as business deductions with supporting documentation.
• Compliance Deadline: Last date for disbursement under LOC is 48 months after scheduled project completion. Ensure all invoices, shipping bills, and tax filings are completed within relevant time limits.

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