What is Set-Off?
Set-off is netting: instead of your foreign client paying you ₹10 lakh and you paying them ₹3 lakh, the two amounts are adjusted and only the balance of ₹7 lakh moves. In business, this happens naturally when you both sell to and buy from the same overseas party, or deal with group companies. Under FEMA, though, setting off export receivables against import payables is a regulated act, not just a bookkeeping entry.
Why it matters for exporters
Every export declared on an EDF creates an open EDPMS entry that the bank expects to close with realisation. If you net a receivable against a payable informally, no money arrives for part of the export, and the entry stays open. RBI's export framework has generally allowed set-off only in defined circumstances, handled through the AD bank with conditions and documentation. The exact conditions sit in the current RBI text and the bank Directions, so check those and talk to your AD bank before agreeing any netting with a client.
Done correctly, set-off is reported and the bank can close the export entry. Done informally, it can look like non-realisation. For a fuller treatment, read set-off of export receivables against import payables. This is general information, not legal advice.
Example
Ember Studios, a Mumbai animation house, invoices a Canadian producer ₹9,00,000 for animation work. The same producer licenses Ember ₹2,50,000 of music. The producer proposes to pay only ₹6,50,000. Before agreeing, Ember asks its AD bank whether the set-off is permitted and how it should be documented, so that the EDPMS entry for the ₹9 lakh invoice can be closed properly.
Common confusion
Set-off is not the same as a discount or credit note. A credit note reduces what the client owes for your service; set-off uses a separate debt you owe to settle part of what is due. See write-off for the case where money never comes at all.