A very simple yet very important part of the Cross border transaction – Purpose code

Purpose codes are codes issued by the Reserve Bank of India that are required for successful cross-border transactions (International Trade). RBI has issued about 188 purpose codes and it’s always safe to cross-check your purpose code before filling in the details. The code is assigned to each transaction involving foreign currency and states the purpose for which the transaction is being made. Reserve Bank of India has assigned specific purpose codes for each cross-border payment in order to meet the regulatory requirements of reporting by the banks. This purpose code becomes the source of information to the Regulators about the remittances received or remitted is what purpose.

Cross-border payments will be increasing as a lot of remittances are being received/sent for investments in startups, LLPs, private limited companies, and overseas education, also an upside in the volume of remittance for exports/imports as there is a lot of focus by the central government on increasing exports

Every cross-border transaction is subjected to some rules. These rules are governed by the Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA) in India.
The remittance Purpose from the sender countries is captured in the SWIFT MT103 message, however, the applicable purpose code has to be assigned by the importer or exporter while submitting the application to their bankers.

In other words, the purpose code assists regulators in determining the precise nature of a cross-border transaction, whether it is inward remittances in foreign currency or outward remittances in foreign currency.

The purpose codes starting with P are for the inward remittances received against exports, (goods/ services/Investment) codes starting with S are the ones that are assigned for the outward remittances (goods/ services/Overseas Investment).

Hence it’s important to indicate the correct purpose code while giving disposal instructions to your bank and verify the same when the advise of remittance is received. A couple of our clients faced issues with reference to outstanding EDPMS entries beyond 2 years and being reported to regulatory agencies due to non. Since the funds received were under the purpose of Merchanting Trade Transaction (P0108), however, the remittances were credited under purpose code as Advance against exports (P0103).

Such small issues lead to hassle and erroneous reporting to the regulatory agencies. Which leads to the noncompliance with FEMA regulations. Certainly, the purpose code title is a straightforward yet vital component of cross-border transactions. It succinctly describes the purpose or nature of the transaction, providing clarity and transparency for both parties involved and regulatory authorities. Accurate purpose code titles help ensure that transactions are properly categorized, reported, and compliant with international regulations.

For all such compliances and to safeguard your company from any hassles, do connect with Sriya Enterprise – Trade Finance and RBI- FEMA compliance advisory and training firm. More about us is available on our site www.sriyaent.com