FEMA - An Overview of relevant provisions for DTAA · FEMA - An Overview of relevant provisions for...
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FEMA - An Overview of relevant provisions for DTAA
BCAS - 15th intensive study course on DTAA
17 January 2015CA Shabbir Motorwala
Contents
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• FEMA – Overview
• Important provisions
• Definitions
• Capital & Current Account Transactions
• Other provisions
• Important Regulations :
• LRS
• Inbound Investments
• Outbound Investments
• LO / BO / PO of Foreign Companies
• ECB
• Q & A
• Object - “facilitating external trade and payments and promoting orderly development and maintenance of foreign exchange market in India”
• Civil law
• Only specified transactions fully regulated [capital account transactions ]
• Citizenship not relevant - Residence criteria emphasized
• Restricted power of search, seizure, etc.
• No presumption of Mens-rea
• Contravention attracts penalty / fine and not imprisonment (except in some cases)
• Provision for compounding
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New era under FEMA
The Foreign Exchange Regulation Act, 1973 (FERA) The Foreign Exchange Management Act 1999 (FEMA)
• Object - Conservation of foreign Exchange resources”
• Criminal law type provisions
• Severe penal provisions
• All acts controlled and regulated
• Applied to Indian Citizens in/outside India and Foreign Citizens in India.
• Blanket powers of search, seizure, imprisonment, etc.
• Presumption of Mens-rea
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Overview
FEMA 1999
Appointed date 1 June 2000
FEMA Rules / Regulations
Rules notified by Central Government (E.g. Current Account Rules)
Regulations notified the RBI (Capital Account)
Consultation between the RBI and the Government
RBI (website www.rbi.org.in)
A.P. (Dir Series) – issued from time to time
Master Circulars – Released once in a year –July – but now updated periodically
F.A.Qs
• AD Bank’s Role
• Powers / responsibilities delegated to AD-Banks – their Role / concurrence very critical
• Many other statutes impact / enshrined in FEMA
• FDI Policy
• Foreign Trade Policy
• Sectoral Regulation
• NBFC
• Insurance
• Portfolio Investments Regulations - SEBI, etc.
• Income Tax
• Companies Act
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Extent, Application and Commencement
Extends to whole of India
Applies to all branches, offices and agencies outside India owned and
controlled by persons resident in India
Applies to contravention committed outside India by any person to
whom the Act applies
Section 1 of FEMA – Scope
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Definitions – Person
Includes
a) an individual,
b) a Hindu Undivided Family,
c) a Company,
d) a firm,
e) an association of persons or a body of individuals, whether
incorporated or not,
f) every artificial juridical person, not falling within any of the preceding
sub-clauses, and
g) any agency, office or branch owned or controlled by such persons
Section 2(u) – Person
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Definitions – Residents
(i) Person residing in India > 182 days during preceding financial year but does not include –
(A) Person who has gone out of India or who stays outside India, in either case
a) For or on taking up employment outside India, or
b) For carrying on outside India a business or vocation outside India, or
c) For any purpose, indicating intention to stay outside India for an uncertain period
(B) Person who has come to or stays in India, otherwise than
a) For or on taking up employment in India, or
b) For carrying on in India a business or vocation in India, or
c) For any other purpose, indicating intention to stay in India for an uncertain period
Cont’d..
Section 2(v) Person resident in India (PRI) means
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Definitions – Residents / Non-Residents
(ii) Any Person or body corporate registered or incorporated in India
(iii) An office, branch or agency in India owned or controlled by a person resident outside India
(iv) An office, branch or agency outside India owned or controlled by a person resident in India.
In view of above, the residential status of a Liaison office in India owned or controlled by a person resident
outside India is a Person resident in India
In view of above, the residential status of a branch outside India owned or controlled by a person resident in India
(say ICICI Bank) is a Person resident in India
Section 2(v) Person resident in India means (cont’d.)
Section 2(w) - Person resident outside India (PROI)
• Person resident outside India means a person who is not resident in India.
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Examples on Resident definition (1 of 2)
Mr. Johny Walker leaves India on 21.12.2014 for taking up employment
abroad.
Mr.Johny Walker will be non-resident with effect from
21.12.2014, irrespective of the fact that he was residing in India
for more than 182 days in the preceding financial year
Mrs Dixit leaves India on 15 June 2014 for USA to help her daughter
during her second pregnancy and stay with her for one to two years till
she settles down after the delivery. She will then come back to India.
Mrs. Dixit’s Residential status would be as under:
F.Y.2014-2015: Resident
F.Y.2015-2016: Non-Resident provided she does not come
back
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Examples on Resident definition (2 of 2)
Ms. Katrina Kaif comes to India on 1st June, 2014
with her husband and sets up her modeling /
business activity.
One View / practical view
Ms. Kaif would be treated as a person
resident in India with effect from her arrival
irrespective of the fact that she has not
stayed in India for more than 182 days in
preceding financial year.
Second view / more legally correct view
Ms Kaif has not fulfilled the larger condition
of staying in India for more than 182 days in
the preceding financial year and therefore
she should be treated as a non-resident.
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Definitions – NRI / PIO
NRI has been defined under FEMA Regulation 2(vi) of the FEMA - 5 (Deposit) Regulations 2000 as follows:
“An NRI is a person resident outside India who is a citizen of India or is a Person of Indian Origin”
Thus, NRI under FEMA may still be a resident under the Income tax laws.
Non Resident Indian (NRI)
Person of Indian Origin (PIO)
• PIO is defined differently in:
• Regulation 2 of FEMA 5 (Deposit) Regulations, 2000
• Regulation 2(c) of FEMA- 21 (Acquisition and Transfer of Immovable Property in India) Regulations, 2000
• Most other notifications follow the FEMA 5 definition of PIO
(Cont’d..)
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Definitions – PIO
Person of Indian Origin (PIO) (cont’d)
Regulation 2 of FEMA- 5 (Deposit) Regulations, 2000 Regulation 2(c) of FEMA 21(Acquisition and Transfer of
Immovable Property in India) Regulations, 2000
A citizen of any country other than Bangladesh or
Pakistan, if
a) he at any time held Indian passport; or
b) he or either of his parents or any of his
grand-parents was a citizen of India by virtue
of the Constitution of India or the Citizenship
Act, 1955 (57 of 1955); or
c) the person is a spouse of an Indian citizen or
a person referred to in sub-clauses (a) / (b)
above.
An individual (not being a citizen of Pakistan or
Bangladesh or Sri Lanka or Afghanistan or China or Iran
or Nepal or Bhutan), who
a) at any time held Indian passport; or
b) who or either of whose father or mother or
whose grandfather or grand mother was a
citizen of India by virtue of the Constitution of
India or the Citizenship Act, 1955 (57 of 1955).
(Until 5 Oct 2009 either father or grand father )
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Definitions – Capital Account Transactions
Means a transaction which alters the assets or liabilities -
Outside India of persons resident in India, (including Contingent Liabilities);
In India of persons resident outside India; and
Includes transactions specified in Section 6(3)
- Investments in foreign security by resident;
- Investments in any Indian security by non-residents;
- Transfer / issue of any security or foreign security by any branch, office or agency in India of a non-resident;
- Borrowing / Lending in Foreign Exchange;
- Borrowing / Lending in rupees between residents and non-residents;
- Deposits between residents and non residents;
- Holding of currency or currency notes;
- Acquisition / transfer of immoveable property in India / outside India (except on lease for = <5 years);
- Giving of guarantee / surety by resident / non-residents.
Every transaction listed above is regulated by a corresponding notification
Section 2(e) – Capital Account Transaction :
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Definitions – Current Account Transaction
Means a transaction other than a capital account transaction and includes:
Payments due in connection with foreign trade, other current business, services, short- term banking
and credit facilities in the ordinary course of business;
Payments due as interest on loans and as net income from investments;
Remittances for living expenses of parents, spouse and children residing abroad; and
Expenses on foreign travel, education and medical care of parents, spouse and children.
Section 2(j) - Current Account Transaction
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Distinction – Capital v. Current Account
• Every Transaction is either Capital or Current Account Transaction
• Rule of Thumb
- Capital Account Transaction generally prohibited unless permitted (generally or specifically)
- Current Account Transaction generally permitted unless prohibited
• Taxation and Accounting Terms not relevant
• Balance of payments based criteria
• In case of doubts refer FEMA Rules / Notifications / Circulars
• Examples:
- Import of machinery in cash – current account transactions
- Loan for investment in machinery – capital account transaction
- Import of machinery for extended credit – capital account transaction
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Section 3 – Dealing in Foreign Exchange, etc.
General or Special permission of RBI required to:
Deal in or transfer of foreign exchange or foreign securities to
person other than authorized person.
Make any payment to or for the credit of a non-resident
Receive otherwise than through authorized person any payment
by order or on behalf of a non-resident without a corresponding
inward remittance.
Enter into a financial transaction in India as consideration for or
in association with acquisition or creation or transfer of a right to
acquire any asset outside India.
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Other Provisions
Section 4 – Holding of Foreign Exchange, etc
Restricts person resident in India to hold, own or possess or transfer any foreign exchange, foreign security or immovable property situated outside India.
Section 5 – Current Account Transaction
Permits drawal of foreign exchange from authorized dealers for a Current Account Transaction
Central Government empowered to impose reasonable restrictions
Section 6 – Capital Account Transaction
Permits drawal of foreign exchange for permissible Capital Account Transactions
RBI to regulate Capital Account Transactions in consultation with Central Government or generally
General permission to PRI to hold foreign exchange assets, etc. (ss. 4)
General permission to NR to hold Indian assets, etc (ss. 5)
RBI to regulate to BO / Office / other place of business in India of PROI (ss. 6)
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Other Provisions
Section 7 – Export of goods and services
Exporter of goods under obligation to furnish to RBI:
Detailed declaration of exports in prescribed form
Required information to ensure realization of export proceeds
Directions by RBI to Exporter of goods for ensuring receipt of export proceeds.
Exporter of services obliged to furnish to RBI or other authority prescribed declaration.
Section 8 – Realization and repatriation of foreign exchange
Person resident in India obliged to take all reasonable steps to realize and repatriate to India all foreign exchange due or accrued.
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Other Provisions
Section 9 – Exemption from realization and repatriation in certain cases:
Possession of foreign currency or coins upto limits
Specified foreign currency accounts upto limits by specified persons
Foreign exchange acquired before 8th July, 1947
Donees to hold foreign exchange upto limits
Foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or other legitimate means upto limits
Other specified foreign exchange receipts
Section 10, 11 and 12 – Authorized Person (AP)
RBI to authorize persons to act as authorized dealer, money changer or off-shore banking unit or in any other manner
Control / Penalty on Authorized Person
Power of RBI to inspect AP
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Other Provisions
Section 13 – Penalties
Upto thrice the amount involved in cases of quantifiable contraventions
Upto Rs. Two lakhs for non-quantifiable contraventions plus Rs. 5,000 per day
Section 14 – Orders of Adjudicating Authority
Section 15 – Power to compound contravention
Section 16 – Appointment of Adjudicating Authority
Section 17 – Appeal to Special Director (Appeals)
Section 19 – Appeal to Appellate Tribunal
Section 20 to 35 – Adjudication and appeal related provisions
Section 36 to 38 – Provisions relating to Enforcement Directorate
Section 39 to 41 – Miscellaneous provisions
Section 42 – Contravention by Companies – persons in charge / responsible covered
Section 43 to 49 – Other provisions
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Important Rules / Regulations in FEMA
Regulations Issued By RBI Sections Master Circular Reference dated 1 July 2014
Capital Account Transactions:
FEMA 120 – Outbound Investment
Section 6(3)
Master Circular No. 11/2014-15
FEMA 20 – Inbound Investment Master Circular No. 15/2014-15*
FEMA 21 – Acquisition / Transfer of Immovable Property in India Regulations
Master Circular No. 4/2014-15
FEMA 22 – Establishment in India of Branch or Office or Other place of business Section 6(6)
Master Circular No. 7/2014-15
Current Account Transactions:
FEMA 23 – Export of Goods and Services
Section 7 Master Circular No. 14/2014-15
Import of Goods and Services Section 5 Master Circular No. 13/2014-15
* One also needs to refer Consolidated FDI policy (effective 1 April 2014)
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FEMA - Current Account Transactions Rules 2000
Transactions expressly prohibited – Schedule I read with Rule 3
Transactions which require prior approval of Government of India
– Schedule II read with Rule 4
Transactions which require prior approval of RBI – Schedule III
read with Rule 5
Relaxations from Rule 4 and 5 for many items paid from Resident
Foreign Currency (RFC) Account and Exchange Earners Foreign
Currency (EEFC) Accounts.
Payments by International Credit Card also possible
FEMA Current Account Transaction Rules
The relevant Master circular for Current Account Transaction is Miscellaneous Remittances from India- Facilities for Residents- Master Circular No- 06/2014-15
dated 1 July 2014
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Sr. No. Transaction Limits without any RBI approval
7 Maintenance of close relatives abroad (also refer Note below)
(i) net salary (after deduction of taxes, contribution to provident fund andother deductions) of a person who is resident but not permanently residentin India and –
(a) is a citizen of a foreign State other than Pakistan; or
(b) is a citizen of India, who is on deputation to the office or branch orsubsidiary or joint venture in India of such foreign company.
(ii.) exceeding USD 100,000 per year, per recipient, in all other cases.
Explanation: For the purpose of this item, a person resident in India onaccount of his employment or deputation of a specified duration(irrespective of length thereof) or for a specific job or assignments, theduration of which does not exceed three years, is a resident but notpermanently resident.
Current Account Transactions--Schedule III read with Rule 5
Note:
• Foreign Citizen / NRI employed in India can also receive salary (net of tax) overseas if on deputation to office / branch / JV / Subsidiary in India under FEMA 10
• Foreign Citizen employed in India can also remit his salary (net of tax) to his foreign currency account maintained outside India
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Sr. No. Transaction Limits without any RBI approval
15 Consultancy services
'infrastructure project‘ are those related to –
(i) Power,
(ii) Telecommunication,
(iii) Railways,
(iv) Roads including bridges,
(v) Sea port and air port,
(vi) Industrial parks, and
(vii) Urban Infrastructure (water supply, sanitation and sewage)
For Infrastructure Projects - USD 10,000,000 per project
For other – USD 1,000,000 per project
Current Account Transactions--Schedule III read with Rule 5
Note:
• Erstwhile limits on payment of Royalty for Know-how transferred done away with and no rigor exits for availing know-how services from outside India
• Payment for software, data-access and various type of services freely permissible
• On behalf payments by Overseas Entities for Residents may not be treated as Current Account Transactions
LRS available to all Resident individuals (RI) including minors
Each RI can invest / remit overseas up to USD 1,25,000 per financial year for any permissible current / capital account transaction or combination of both – family members can consolidate and remit
RI can acquire and hold shares, ESOP, Mutual Fund, VCF or any other asset outside India including immovable property without prior approval of RBI using the LRS.
RI can open, hold and maintain foreign currency accounts with a bank outside India for remittances under the scheme without the prior approval of RBI.
With effect from August 5, 2013 RI’s are permitted to set up Joint Ventures (‘JV’) or Wholly Owned Subsidiaries (‘WOS’) outside India for bonafide business activities only (as stipulated) within the overall LRS ceiling
Income and sum remitted need not be brought back into India and can be reinvested overseas
Remittances inter alia not permitted for:
Remittance directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan;
Remittances to countries identified by the Financial Action Task Force as ‘non-co-operative Countries or Territories’
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Liberalized Remittance Scheme (‘LRS’) – An Overview
An Overview of Inbound Investment - FEMA 20 – Schedules (2/2)
Schedule 1
FDI Scheme for Foreign Investors including NRIs
Automatic Route or Approval Route i.e. prior approval from the Foreign Investment Promotion Board
Negative lists
Schedule 2 / 2A
FII including sub-account / Registered Foreign Portfolio Investors (RFPI) Investments under PIS
RFPI = FIIs + QFIs
Schedule 3
NRIs Investment on Indian Stock Exchange on repatriation / non-repatriation basis under PIS
Schedule 4
NRI Investment on non-repatriation basis
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Schedule 5
Purchase and sale of securities other than shares or convertible debentures by Non-Resident (FIIs, QFI and NRIs)
Schedule 6
Foreign Venture Capital Investors Investment Scheme (SEBI registered)
Schedule 7
IDR by eligible foreign companies in India
Schedule 8
Investment by QFI in shares (old regime)
Schedule 9
FDI in LLPs – prior approvall of the FIPB
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Inbound Investments – Schedule 1 - FDI in an Indian Company
• Key regulatory matrix
• Automatic Route i.e. General permission v. Approval Route i.e. prior FIPB and / or RBI approval
• Includes downstream investments and calculation of indirect equity
• Sectoral / performance related conditions e.g. minimum capitalization norms for NBFCs,
• Instrument related conditions – Plain Equity v. CCPS / CCDs
• Valuation for issue / transfer of shares – Any Internationally accepted method of valuation for unlisted company(statutory auditor/ any CA / merchant banker)
• Timelines within which shares / convertible instruments are issued (180 days criteria)
• Special cases – mergers, bonus, rights issue, esop, etc.
• Key Filings with RBI through AD Banks
• Receipt of share application with KYC of investor – 30 days (UIN allotted by RBI)
• Issue of Shares / convertible instruments within 180 days - Form FC GPR within 30 days (RIN allotted by RBI)
• Annual Return of Foreign Liabilities and Assets - 15 July
• Other filings with AD Banks for transfer of shares between Rs and NRs
• Form FC-TRS (60 days)
• Government / DIPP Intimation for downstream investments within 30 days
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Inbound - LO, BO and PO in India of Foreign Company
Key regulatory matrix
• No foreign company can set-up a place of business without general permission or specific approval of RBI
• Specified activities and conditions for Liaison Office (LO) / Branch Office (BO) / Project Office (PO)
• LO – primarily only communication channel and representation activities
• BO – specified permitted activities such as Export –Import / Professional & Consultancy / Research /Technical Services / Ites & software / Airline and Shipping
• PO – project specific work
• Set-up of LO / BO in India by Foreign Company needs prior RBI approval and is subject to conditions
• Application to RBI through AD Banks + eligibility norm (NBFC: only LO allowed for limited time)
• PO set-up under General Permission i.e. AD Bank’s approval subject to eligibility framework
• Each option comes with its own set of regulatory complexity and compliance requirements
• LO / BO / PO winding up power with AD Banks and also LO’s period extension power is also with AD Banks
• Foreign Bank’s LO and BO governed not by FEMA but by Banking Regulation Act
• Other cases – setting up by BO in SEZ by Foreign Companies, LOs of Foreign Insurance Companies, etc.
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Outbound Investments – i.e. Indian Company / Party investing Overseas
• Key regulatory matrix for investing in overseas JV / WOS
• Automatic Route (file Form ODI with AD Bank at remittance stage) v. Approval Route (RBI)
• An upper cap on aggregate overseas investments in all ventures with fair valuation and filing obligation
• 400% of net-worth as per last audited B/Sh for Indian Company/ Partnership Firm / LLP
• Equity, loan and specified percentage of guarantees covered in financial commitment ceiling
• Additional conditions for overseas investments in Financial Services Sector
• Several other parameters and complexities exists including for write-offs / divestments
• Individuals investing in operating single layer JV / WOS within overall LRS ceiling covered
• Most common issues: Target investment / acquisition through multiple layer SPVs + Round Tripping +Bonafide business activity v. Financing / Portfolio Investments
• Statutory Auditor’s certificate for each limp of overseas investment
• All the terms and conditions of Outbound Investment complied with
• Each case / certificate is likely to be unique and time sensitivity adds to the difficulties
• RBI allots UIN for each overseas JV / WOS against Form ODI required at investment stage
• Annual filings with RBI – Form APR (30 June / earlier six months from year end)
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Outbound Investments – i.e. Indian Company LO / BO outside India
• Regulatory Framework
• Indian Company / residents allowed to set-up following overseas
• LO
• BO
• PO
• Warehouse
• Agents / consignment agents
• Setting up LO / BO/ PO, etc treated as a current account transactions
• In general, no immovable property can be acquired overseas except on lease for less than five years
• Foreign currency account can be maintained overseas with permission of AD-Banks
• Limits specified for remittances to these bank accounts and realization of incomes.
• Detail guidelines for projects / onsite work outside India
• PEM
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ECBs…. The Dream girl
• Very Rigid regulatory framework and un-clarity exists on several fronts
• Automatic Route (i.e. prior RBI registration – Loan Registration Number ) v. Approval Route (prior approval)
• Eligible borrower and Recognized Lender
• Amount and Minimum Average Maturity Period (MAMP)
• All-in-cost ceilings
• End-use
• No guarantee by Banks / NBFCs in India
• Security
• Parking of ECB proceeds and interim utilization
• Prepayment and Refinancing
• Compliances - Initial Registration, Monthly filings and certification by AD Bank + CA
• Special cases – Conversion of ECB into Equity, FCCB, FCEB, etc
• Several powers delegated to AD Banks
• Changes in drawdown / repayment schedule subject to maintenance of original MAMP
• CAs / CS to certify ECB Compliance in LRN application (Form 83) and Monthly Form ECB 2
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Thank You !
The views in this presentation are personal views of the Presenter. Further, the information contained is of a general natureand is not intended to address the circumstances of any particular individual or entity. Although, the endeavor is to provideaccurate and timely information, there can be no guarantee that such information is accurate as of the date it is received orthat it will continue to be accurate in the future. No one should act on such / this information without appropriateprofessional advice which is possible only after a thorough examination of facts / particular situation.