OVERVIEW OF FEMA - ctconline.org OF FEMA INTENSIVE STUDY COUSRE ON FEMA ... Transition from Foreign...
Transcript of OVERVIEW OF FEMA - ctconline.org OF FEMA INTENSIVE STUDY COUSRE ON FEMA ... Transition from Foreign...
OVERVIEW OF FEMA
INTENSIVE STUDY COUSRE ON FEMA –THE CHAMBER OF TAX CONSULTANTS
15th December, 2017
By:CA Manoj Shahe-mail :[email protected]
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Transition from Foreign Exchange Regulation Act,1973 to Foreign Exchange Management Act, 1999
Post liberalization (i.e. New Industrial policy of 1991) therewas need to remove shackles of regulatory and legalprovisions.
Need to consolidate and amend the law relating to foreignexchange with the objectives of facilitating external trade andpayments and for promoting the orderly development andmaintenance of foreign exchange market in India.
Need to take various steps to make ‘New Industrial Policy’-workable and meaningful.
Industrial licensing was made pragmatic and objective-oriented.
It was decided to review provisions of Foreign ExchangeRegulation Act, 1973 (FERA).
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Transition from Foreign Exchange Regulation Act,1973 to Foreign Exchange Management Act, 1999
Intention was to bring provisions of FERA in line withemerging trends of liberalization so as to remove obstacles inthe inward flow of foreign exchange and foreign investment.
Accordingly, on June 1, 2000, the Foreign ExchangeManagement Act, 1999 (FEMA) brought in force to replacethe then existing FERA.
It is an act to manage the foreign exchange of India asopposed to FERA which was enacted to regulate/control theforeign exchange.
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Structure of FEMA
Applies to the whole of India and all branches, offices andagencies outside India which are owned or controlled by aperson resident in India.
FEMA has 49 sections of which 9 (section 1 to 9) aresubstantive and the rest are procedural/ administrative
Section 46 of FEMA grants power to Central Governmentto make rules to carry out the provision of FEMA
Section 47 of FEMA grants power to RBI to makeregulations to implement its provisions and the rules madethere under
RBI is entrusted with the administration andimplementation of FEMA
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Substantive Provisions
Section Description
1 Application and Commencement of FEMA
2 Definitions
3 to 9Provisions relating to Regulations and Management ofForeign Exchange
10 to 12 Provisions relating to Authorized Person
13 to 15 Provisions relating to Contraventions and Penalties
16 to 38Provisions relating to Adjudication, Appeal andDirectorate of Enforcement
39 to 49 Miscellaneous Provisions
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Rationalization of FEMA Notifications
FEMA was enacted with 25 original notifications in 1999 andover years had more than 360 amendments.
A need was felt to consolidate the regulations and rationalizethem.
Accordingly, RBI has started revising regulations issuedunder FEMA. Consequently on issue of revised regulationsoriginal notifications and subsequent amendments standrepealed.
Revised regulations carry the same numbers as in the oldregulations with a suffix ‘(R)’ along with the year in whichthey are published.
Till date 12 notifications are revised. [5(R), 6(R), 7(R), 9(R),10(R), 11(R), 12(R), 13(R), 14(R), 15(R), 18(R), 20(R), 22(R) and23(R)]
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Master Directions
RBI has come up with Master Directions covering foreignexchange transactions.
Master Directions consolidate instructions rules andregulations.
One Master Direction is issued for each subject mattercovering all instructions on the subject.
Master Directions are updated as and when there is change inrules/regulations or change in policy.
Existing set of Master Circulars stand withdrawn with issueof Master Directions.
https://www.rbi.org.in/scripts/FS_Notification.aspx?fn=5&fnn=2764
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A.P. (Dir Series) Circulars and Master Directions
Directions issued by RBI u/s. 10(4) and 11(1) of FEMA toAuthorized Persons (AP)
These directions are called – A.P. (Dir Series) Circulars
APs are Authorized Dealers, Money Changers and banks whoare authorized to deal in Foreign Exchange
These Circulars are operational instructions to AP by RBI
Legal validity of these Circulars have been upheld in the case ofProf. Krishnaraj Goswami v. RBI, [2007 (6) Bom. CR 565]
Court upheld the power of RBI to issue such Circulars based onpowers conferred to RBI u/s. 10(4) & 11(1) & negated thecontention that RBI has no jurisdiction to issue such Circulars
Master Directions have been issued on 1st January 2016subsuming the position as on date and consolidating all theexisting changes (subject wise) and thereafter the same areregularly updated.
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Some of the important definitions
Foreign Exchange [Sec 2(n)] –foreign exchange means foreign currency and includes –i. deposits, credits and balances payable in any foreign currency,
ii. Drafts, traveller’s cheques, letter of credit or bills of exchange,expressed or drawn in Indian currency but payable in any foreigncurrency.
iii. Draft, travellers cheques, letters of credit or bills of exchange drawnby banks, institutions or persons outside India, but payable inIndian currency.
Foreign Security [Sec 2(o)] –foreign security means any security, in the form of shares, stocks, bonds,debentures or any other instrument denominated or expressed in foreigncurrency and includes securities expressed in foreign currency, but whereredemption or any form of return as such interest or dividends is payablein Indian currency.
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Some of the important definitions
Repatriate to India [Sec 2(y)] –Repatriate to India means bringing into India the realisedforeign exchange and –i. the selling of such foreign exchange to an authorised
person in India in exchange for rupees, or
ii.the holding of realized amount in an account with anauthorized person in India to the extent notified by thereserve Bank
and includes use of the realised amount for discharge of adebt or a liability denominated in foreign exchange and theexpression “repatriation” shall be construed accordingly.
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Some of the important definitions
‘Repatriation outside India’ means buying ordrawing of foreign exchange from an authorized dealer inIndia and remitting it outside India through normalbanking channels or crediting it to an account denominatedin foreign currency or to an account in Indian currencymaintained with an authorized dealer from which it can beconverted in foreign currency. [Regulation 2(d) ofNotification No. 21]
Transfer [Sec 2(ze)] - includes sale, purchase, exchange,mortgage, pledge, gift, loan or any other form of transfer ofright, title, possession or lien
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FEMA Notification No. 5(R) – Foreign ExchangeManagement (Deposit) Regulations, 2016Person of Indian Origin (PIO) means a person resident outside Indiawho is a citizen of any country other than Bangladesh or Pakistanor such country as may be specified by the Central Government,satisfying following conditions:a. Who was a citizen of India by virtue of the constitution of India or the
Citizenship Act, 1955 (57 of 1955); or
b. Who belonged to a territory that became part of India after 15th Day ofAugust 1947; or
c. Who is a child or a grandchild or a great grandchild of a citizen ofIndia or of a person referred to in clause (a) or (b); or
d. Who is a spouse of foreign origin of a citizen of India or spouse offoreign origin of a person referred to in clause (a) or (b) or (c)
(Person of Indian Origin includes Overseas Citizen of Indiacardholder within meaning of Section 7(A) of the Citizenship Act,1955)12
Definition of Person of Indian Origin (PIO) under various Notifications
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FEMA Notification No. 13(R) – Foreign Exchange Management(Remittance of Assets) Regulations, 2016
Person of Indian Origin (PIO) shall have same meaning assigned underForeign Exchange Management (Deposit) regulations, 2000
FEMA Notification No. 21 – Foreign Exchange Management (Acquisitionand Transfer of Immovable Property in India) Regulations, 2000
Person of Indian Origin (PIO) means an individual (not being a citizen ofPakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran orNepal or Bhutan), who
a. at any time held India Passport, or
b. Who or either of whose father or mother or whose grandfather orgrandmother was a citizen of India by virtue of the Constitution ofIndia or Citizenship Act, 1955 (57 of 1955) or
(Note: Macau and Hong Kong are not added in definition of PIO, but personscitizens of these two countries are prohibited from acquiring or transferringimmovable property in India- Regulation 7 of Notification No.21)-
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Definition of Person of Indian Origin (PIO) under various Notifications
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FEMA Notification No. 24 – Foreign ExchangeManagement (Investment in Firm or Proprietary Concern)Regulations, 2000
Person of Indian Origin (PIO) means a citizen of anycountry other than Bangladesh or Pakistan or Sri Lanka, if
a. He at any time held India Passport, or
b. He or either of his parents or any of his grandparentswas a citizen of India by virtue of the Constitution ofIndia or Citizenship Act, 1955 (57 of 1955) or
c. The person is a spouse of an Indian citizen or a personreferred to in sub-clause (a) or (b).
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Definition of Person of Indian Origin (PIO) under various Notifications
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Residential Status under FEMA
Under FEMA residential status is of two types: Person resident in India
Person resident outside India
Under FERA, citizenship was considered as decidingfactor
FEMA lays emphasis on 'residing' which denotespermanency
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Residential Status under FEMA
Purpose under FEMA is different as compared to Income Tax
Under Income Tax, issue is of taxability of income which isdetermined for the full year, therefore number of days concepthas been adopted under Income Tax
Whereas under FEMA regulations are there for undertakingtransaction itself, therefore clarity on status at the time ofundertaking transaction is a must
Though FEMA also uses the concept of number of days stay (ofmore than 182 days but of preceding financial year) but
importance is given to intention of going out of India foremployment, business or intention to stay outside India foruncertain period
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PERSON RESIDENT IN INDIA [Sec. 2(v)(i) of FEMA]:
Residing in India for > 182 days during the course of preceding F.Y.but doesn’t include
going out of India or staying outside India
for taking up employment
for carrying business or vocation
for any other purpose in such circumstances as would indicatehis intention to stay outside India for uncertain period
coming to India or staying in India otherwise than
for taking up employment
for carrying business or vocation
for any other purpose in such circumstances as would indicatehis intention to stay in India for uncertain period
PERSON RESIDENT OUTSIDE INDIA[Sec. 2(w) of FEMA]: aperson who is not resident in India.
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Residential Status under FEMA
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Person to be resident in India, has to reside in India for morethan 182 days during the previous financial year
Exclusion to this is - if a person stays outside India foremployment, for vocation or for any other purpose foruncertain period, then even if he has resided in India for morethan 182 days he will become a ‘person resident outside India’
Moreover a person to be treated as person resident in India hehas to satisfy not only the condition of period of stay (i.e. 182days) but has to also comply with the conditions of the'purpose' of stay i.e. for taking up employment, carrying onbusiness or vocation in India or for any other purpose whichwould indicate his intention to stay in India for an uncertainperiod
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Residential Status under FEMA
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RBI may ignore the arithmetic condition (i.e. of 182 days) andtreat the person who comes to or stays in India for any of thethree purposes set out in section 2(v)(i)(B) as ‘person residentin India’ even though he may not have resided in India for aperiod of 182 days or more during the preceding financialyear. However legal tenability of such a view cannot be saidto be free from doubt.
RBI has a very narrow approach towards non residentacquiring immovable property in India. It gives a weightedsignificance to the arithmetic condition of staying in India formore than 182 days during the preceding financial year.
RBI does not determine the residential status. Under FEMA,residential status is determined by operation of law. Theonus is on an individual to prove his / her residential status,if questioned by any authority.
Residential Status under FEMA
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Residential Status under FEMA –Indian Students Studying Abroad
A.P. (DIR Series) Circular No. 45 dated December 8, 2003
While taking up studies, students may have to take upjob or seek scholarships to supplement their income. As aresult their stay gets prolonged than what is intendedwhile leaving India.
They are not dependent for a dominant part of theirexpenses on remittances from their households in India.
Hence, their stay will be for more than 182 days and intentionwill also be to stay outside India for uncertain period. Thusthey can be treated as Non Resident Indians (NRI).
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Current and Capital Account TransactionDefinitions
Capital Account transactionmeans a transaction which altersassets or liabilities includingcontingent liabilities, outsideIndia of person resident in Indiaor assets and liabilities in India ofpersons resident outside India.
It’s an economic definition ratherthan an accounting or legaldefinition.
Current Account transaction istransaction other than a capitalaccount transaction and generallyincludes:a. Payments due in connection with
foreign trade, Short term bankingand credit facilities.
b. Payment due as interest on loanand income from investment.
c. Remittances for living expensesof parent, spouse and childrenresiding abroad.
d. Expenses in connection withforeign travel, education andmedical care of parents, spouseand children
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Capital Account Transaction –FEMA Notification No. 1
Schedule I [Regulation 3(1)(A)]: Classes of capital accounttransactions of persons resident in Indiaa) Investment by a person resident in India in foreign securities
b) Foreign currency loans raised in India and abroad by aperson resident in India
c) Transfer of immovable property outside India by a personresident in India
d) Guarantees issued by a person resident in India in favour of aperson resident outside India
e) Export, import and holding of currency/currency notes
f) Loans and overdrafts (borrowings) by a person resident inIndia from a person resident outside India
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Capital Account Transaction –FEMA Notification No. 1 Contd…
g) Maintenance of foreign currency accounts in India andoutside India by a person resident in India
h) Taking out of insurance policy by a person resident in Indiafrom an insurance company outside India.
i) Loans and overdrafts by a person resident in India to aperson resident outside India.
j) Remittance outside India of capital assets of a person residentin India.
k) Sale and purchase of foreign exchange derivatives in Indiaand abroad and commodity derivatives abroad by a personresident in India.
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Capital Account Transaction –FEMA Notification No. 1 Contd…
Schedule II [Regulation 3(1)(B)]: Classes of capital accounttransactions of persons resident outside India.a) Investment in India by a person resident outside India, that is
to say,i. Issue of security by a body corporate or an entity in India
and investment therein by a person resident outside India;&
ii. Investment by way of contribution by a person residentoutside India to the capital of a firm or a proprietorshipconcern or an association of persons in India.
b) Acquisition and transfer of immovable property in India by aperson resident outside India.
c) Guarantee by a person resident outside India in favour of, oron behalf of, a person resident in India.
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Capital Account Transaction –FEMA Notification No. 1 Contd…
d) Import and export of currency/currency notes into/from Indiaby a person resident outside India.
e) Deposits between a person resident in India and a personresident outside India.
f) Foreign currency accounts in India of a person resident outsideIndia.
g) Remittance outside India of capital assets in India of a personresident outside India.
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Cap A/c Transaction and Contingent liability of a person resident outside
India
The definition of Cap A/c Transaction does not include contingentliability of a person resident outside India. However, Schedule II toNotification 1 includes in the list of capital account transaction-
Guarantee given by a person resident outside India to any personresident in India though in the nature of Cap A/c Transaction byvirtue of Sch II to Not. 1. However, such guarantee does notrequire any reporting.
In case the guarantee is invoked and the NR guarantor has to paythe resident creditor the same amount can be reimbursed byresident to the rupee equivalent of the amount paid by the NRguarantor. (Reference - FEMA Notification 16/2000 ). Thisprovision is also to give relief to resident out of rigours of 3(b).
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Contingent Assets whether Capital Account or Current Account transaction?
Payment of options premium abroad for securities / commoditiestrading?
Options premium creates a contingent asset
There is no future liability for any payment
Further this is not in the nature of remittance for margins ormargin calls to overseas exchanges/ overseas counterparty
Payment of Life Insurance Policy Premium – Notification 12(R).
Policy must be held under a specific or general permission ofRBI.
Maturity proceeds or any claim due on policy shall berepatriated to India within seven days from date of receipt.
Payment of health Insurance Premium should be within limits ofLiberalized Remittance Scheme.
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Gift Transactions Gift of sum of money by resident to a non-resident or non-resident to
resident is a Current A/c Transaction.
Gift of foreign security is a Capital A/c Transaction having followingimplications:
Inheritance of foreign security:
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Donor Donee Remarks
NR R Permissible Reg 22(1)(i) of 120
R R Not covered by general permission
R NR Not covered by general permission
Donor Donee Remarks
NR R Permissible Reg 22(1)(iii) of 120
R R Permissible Reg 22(1)(iii) of 120
R NR Not covered by general permission
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Gift Transactions Gift and inheritance of Immovable Property Situated outside India:
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Donor Donee Remarks
NR R Not covered by general permission
R R Regulation 5(1)(a) for Sec 6(4) cases and 5(2) of Not. 7(R)
R NR Not covered by general permission
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Settling Property in Trust
Resident becoming beneficiary in an overseas trust.
Resident settling properties in a trust having NRI beneficiaries.
The assets settled should be FEMA compliant and trusteesshould be resident Indian as per FEMA.
FEMA Master Direction No. 13 – Remittance of Assets- Para3.2(iii) - in case settlement is done without retaining any life interestin the property i.e. during the lifetime of the owner/ parent, it wouldtantamount to regular transfer by way of gift and the remittance ofsale proceeds of such property would be guided by the extantinstructions on remittance of balance in the NRO account;
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Amendments to Section 6 (date yet to be notified)
The RBI may, in consultation with the Central Government specifyany class or classes of capital account transactions, involving debtinstruments, which are permissible, the limit up to which FE shallbe admissible for such transactions, and any conditions whichmay be placed.
The CG may, in consultation with the RBI specify any class orclasses of capital account transactions, not involving debtinstruments, which are permissible, the limit up to which FE shallbe admissible for such transactions, and any conditions whichmay be placed
Once notified, all Capital Account transactions, except involvingdebt instruments will be regulated by the CG, which arecurrently being regulated by the RBI.
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Capital Account Transaction
Section 6(4) – a person resident in India may hold, own,transfer or invest in foreign currency, foreign security orany immovable property situated outside India if suchcurrency, security or property was acquired, held orowned by such person when he was resident outsideIndia or inherited from a person who was resident outsideIndia
Section 6(5) – a person resident outside India may hold,own, transfer or invest in Indian currency, security or anyimmovable property situated in India if such currency,security or property was acquired, held or owned by suchperson when he was resident in India or inherited from aperson who was resident in India
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Capital Account Transaction under Section 6(4)
RBI has vide its A.P. (DIR Series) Circular No. 90 datedJanuary 9, 2014 clarified that the following transactionsshall be covered under section 6(4) of FEMA, 1999:
a) Foreign currency accounts opened and maintained bysuch a person when he was resident outside India;
b) Income earned through employment or business orvocation outside India taken up or commenced, or frominvestments made, or from gift or inheritance receivedwhile such a person was resident outside India;
c) Foreign exchange including any income arising therefrom, and conversion or replacement or accrual to thesame, held outside India acquired by way ofinheritance from a person resident outside India;
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Capital Account Transaction under Section 6(4)
A person resident in India may freely utilize all theireligible assets abroad as well as income on such assets orsale proceeds thereof received after their return to India formaking any payments or to make any fresh investmentsabroad without approval of RBI.
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Current Account Transaction
Current account transaction is a transaction other than acapital account transaction
Current account transactions are governed by ForeignExchange Management (Current Account Transaction) Rules,2000 ("Current Account Transactions Rules").
India is signatory to WTO Agreement and in terms of ArticleVIII; it states that “......no member shall, without the approval ofthe Fund (IMF), impose restrictions on the making of payments andtransfers for current international transaction.”
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Current Account Transaction
Current account transactions are divided into 3 schedules inCurrent Account Transactions Rules:-
Schedule I – Prohibited Transactions
Schedule II – Transactions requiring prior approval of Governmentof India
Schedule III – Transactions requiring prior approval of RBI
Drawal of foreign exchange is prohibited for – Transactions specified in Schedule I; or
Travel to Nepal and / or Bhutan; or
Transaction with person resident in Nepal or Bhutan (thisprohibition may be relaxed by special approval).
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Current Account Transaction
Schedule I (Rule 3): Transactions which are prohibited Remittance out of lottery winnings (*)
Remittance of income from racing/riding etc., or any other hobby
Remittance for purchase of lottery tickets, banned/prescribed magazines,football pools, sweepstakes etc.
Payment of commission on exports made towards equity investment inJV/WOS abroad of Indian companies.
Payment of commission on exports under Rupee State Credit route exceptcommission up to 10% of invoice value of exports of tea and tobacco.
Payment related to ‘Call Back Services’ of telephones
Remittance of interest income of funds held in Non-resident Special RupeeScheme A/c.
(NOT PERMISSIBLE EVEN FROM RFC and EEFC ACCOUNT)
* - In terms of FDI Policy even technology collaboration (franchise,trademark, brand name, management contract is prohibited for lotterybusiness and gambling and betting)
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Current Account Transaction
Schedule II (Rule 4) Transactions requiring prior approvalof Government:
Purpose of remittance Ministry/Department of Govt. of India
Cultural tours Ministry of Human resourcesDevelopment
Advertisement in foreign print media forpurpose other than promotion of tourism,foreign investments and internationalbidding (exceeding USD 10,000) by a StateGovernment and its Public sectorundertaking
Ministry of Finance
Remittance of freight of vessel charted by aPSU
Ministry of Surface Transport
Payment of import [through oceantransport] by a Govt. department or a PSUon CIF basis
Ministry of Surface Transport
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Current Account Transaction
Purpose of remittance Ministry/Department of Govt. of India
Multimodal transport operators makingremittance to their agents abroad
Registration Certificate from theDirector General of Shipping
Remittance of hiring charges oftransporters by TV channels, internetservice providers
Ministry of Information andBroadcasting, Ministry ofCommunication and Informationtechnology
Remittance of container detention chargesexceeding rate prescribed by DirectorGeneral of Shipping
Ministry of Surface Transport
Remittance of prize money/sponsorship ofsports activity abroad by a person otherthan International/National/State Levelsports bodies if the amount involvedexceeds USD 1,00,000
Ministry of Human ResourcesDevelopment (Department of YouthAffairs and Sports)
Remittance for membership of P&I club Ministry of Finance
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Current Account Transaction
Schedule III (Rule 5): Prior Approval of RBIFacilities for Individuals - Individuals can make remittance within limit ofUSD 2,50,000 for following facilities. However, any additional remittance inexcess of said limit shall require RBI approval.
i. Private visits to any country (except Nepal and Bhutan)
ii. Gift or donation
iii. Going abroad for employment
iv. Emigration
v. Maintenance of close relatives abroad
vi. Travel for business, or attending a conference or specialised training or formeeting expenses for meeting medical expenses, or check up abroad, or foraccompanying as attendant to a patient gong abroad for medicaltreatment/check up.
vii. Expenses in connection with medical treatment abroad
viii.Studies abroad
ix. Any other current account transaction.
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Current Account Transaction
For items mentioned at (iv), (vii) and (viii), individual may remitamount in excess of USD 2,50,000 if it is so required by a country ofemigration, medical institute offering treatment or the university.
A person who is resident but not permanently resident and is:
A citizen of a foreign state other than Pakistan; or
Is a citizen of India, who is on deputation to the office or branchof a foreign company or subsidiary or joint venture in India ofsuch foreign company
may make remittance up to his net salary (after deduction of taxes,contribution to provident fund and other deductions.
[for purpose of this item, a person resident in India on account of hisemployment or deputation of a specified duration (irrespective of lengththereof) or for a specific job or assignments, the duration of which doesnot exceed three years, is a resident but not permanently resident]
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Current Account Transaction
An entity in India may remit PF or pension in respect of itsemployees who are resident in India but not permanently residentin India (Regulation 5 of Notification 13R)
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Current Account Transaction
Facilities for persons other than individuals – Following remittancesby persons other than individuals shall require prior approval of RBI
Donations exceeding 1% of their foreign exchange earnings duringthe three financial years or USD 5,00,000 whichever is less.
Commission per transaction to agents abroad for sale of residentialflats or commercial plots in India exceeding USD 25,000 or 5% ofinward remittance whichever is more.
Remittances exceeding USD 1,00,00,000 per project for anyconsultancy services in respect of infrastructure projects and USD10,00,000 per project for other consultancy services procured fromoutside India.
(Infrastructure shall mean as defined in Explanation to para1(iv)(A)(a) of Schedule I of FEMA 3.
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Current Account Transaction ‘Infrastructure Sector’ has the same meaning as given in the
Harmonised Master List of Infrastructure sub-sectors approved byGovernment of India vide Notification F. No. 13/06/2009-INF datedMarch 27, 2012 as amended / updated from time to time.
Thus infrastructure sector and sub-sectors for the purpose of ECBinclude (Para 1(iv)(A)(a) of Schedule I of FEMA 3):
a. Energy
b. Communication
c. Transport
d. Water and Sanitation
e. Mining, exploration and refining
f. Social and commercial infrastructure (includes Hospitals/Hotels)
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Current Account Transaction : Pre-incorporation Exps
Remittances exceeding 5% of investment brought into India or USD1,00,000 whichever is higher for reimbursement of pre-incorporation expenses by entity in India.
As per FEMA Notification No. 20:
Capitalization of import of capital goods/ machinery/ equipment(excluding second-hand machinery) and pre-operative/ pre-incorporation expenses (including payments of rent etc.) - Thisrequires Government Approval- Para 3(e) of Sch I of Not. 20
Capitalization of any other funds payable by the investee company,remittance of which does not require prior permission ofgovernment [A.P. (DIR Series) circular No. 31 dated September 17,2014]. – Para 2(4)(iv) of Sch I of Not. 20
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Current Account Transaction
Unincorporated Joint Ventures - Co-operationAgreements/Strategic Alliances
It’s a contractual relationship/arrangement like a cooperationagreement or a strategic alliance wherein the parties agree tocollaborate as independent contractors rather than shareholders in acompany or partners in a legal partnership.
Co-operation agreements / strategic alliances can be employed forthe following types of business activities: Technology transfer agreements
Joint product development
Purchasing agreements
Distribution agreements
Marketing and promotional collaboration
Intellectual advice In such a JV the rights, duties and obligations of theparties as between themselves.
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Current Account Transaction
Royalties and Lump Sum Fees
Earlier there were monetary caps on remittances (both lumpsumfees and royalties) made for technology collaborations andlicense or use of trademark / brand name.
Now there are no restrictions and the payments towards thelumpsum fees or royalties for technology collaborations andlicense or use of trademark / brand name can be made under theautomatic route, without any monetary cap
The limits were there in Schedule II which read as under:
Remittances under technical collaboration agreements where payments ofroyalty exceeds 5% on local sales and 8% on exports and lump sumpayments exceeds USD 2 million.
This has been removed w.e.f. 16/12/2009
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Current Account Transaction
Advance against exports of goods can be received by an exporterfrom a buyer or third party named in export declaration.
Interest can be paid on advance payment (rate of interest shall notexceed LIBOR plus 100 basis points).
Shipment of goods needs to be made within one year from the dateof receipt of Advance.
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Features of deposits schemes under FCNR /NRE /NRO account
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Particulars Non-Ordinary Rupee Account (NROAccount)
Non-Resident (External) Rupee Account Scheme (NRE Account)
Foreign Currency (Non-Resident)Account (Bank) (FCNR(B) Account)
Who can open an account
Person resident outside India (Individuals ofPakistan nationality and entities of Pakistanand Bangladesh ownership require RBIapproval. Individuals of Bangladeshnationality may be allowed by AD Banksubject to holding of valid visa and residentialpermit issued by FRO and FRRO)
NRIs and PIOs NRIs and PIOs
Repatriable / Non-Repatriable
Non-Repatriable (Except under USD 1 millionper F.Y. scheme)
Repatriable Repatriable
Type of account
Current, Savings, Recurring or Fixed DepositAccounts
Current, Savings,Recurring orFixed DepositAccounts
Fixed deposits
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Features of deposits schemes under FCNR /NRE /NRO account
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Particulars Non-Ordinary Rupee Account (NRO Account)
Non-Resident (External) Rupee Account Scheme (NRE Account)
Foreign Currency (Non-Resident)Account (Bank) (FCNR(B) Account)
Joint accounts
Jointly with residents on‘former or survivor’ basis.NRIs and / or PIOs may holdaccount jointly with otherNRIs and / or PIOs.
Joint accounts can be openedby two or more NRIs and/orPIOs or with a residentrelative(s) on ‘former orsurvivor’ basis.
Same as NRE account
Major Permissible Debits
Local rupee paymentsincluding payments forinvestments, Remittanceoutside India of currentincome in India (net of taxes),transfer to other NROaccounts, settlement ofcharges on InternationalCredit Cards.
Local disbursements,remittance outside India,transfer to other NRE /FCNR account , Investmentin shares/ securities/commercial paper of anIndian company or purchaseof immovable property inIndia etc.
Same as NRE account
CHARTERED ACCOUNTANTS
Shah & Modi
Features of deposits schemes under FCNR /NRE /NRO account
52
Particulars Non-Ordinary Rupee Account (NROAccount)
Non-Resident (External) Rupee Account Scheme (NRE Account)
Foreign Currency (Non-Resident)Account (Bank) (FCNR(B) Account)
Major Permissible Credits
Remittance in permittedforeign currency,Deposit by accountholder during temporaryvisit to India, Transferfrom other NROaccounts, legitimate duesin India ofaccountholder.
Remittance in permitted foreign currency, proceeds of personal cheques, proceeds of
foreign currency / bank notes tenderedduring temporary visit to India,
transfer from other NRE / FCNR account, interest accrued on funds held in account, current income due in India, maturity of sales proceeds of permissible
investment in India, refund of shares or debentures to new
issue, refund of application/earnest
money/purchase consideration on accountof non allotment of flat etc.
Same as NREaccount
CHARTERED ACCOUNTANTS
Shah & Modi
Features of deposits schemes under FCNR /NRE /NRO account
53
Particulars Non-Ordinary Rupee Account (NROAccount)
Non-Resident (External) Rupee Account Scheme (NRE Account)
Foreign Currency (Non-Resident)Account (Bank) (FCNR(B) Account)
Loan – to account holders
Rupee loan againstsecurity of fixeddeposits for personalpurpose or businesspurpose except forrelending oragricultural /plantation activity orfor investment in realestate business
Overdraft
• For personal purpose orbusiness purpose exceptfor relending oragricultural / plantationactivity or for investmentin real estate business• For direct investment in
India in firms /companies on non-repatriation basis• For purchase of flat in
India for own residentialpurpose
Same as NRE account
CHARTERED ACCOUNTANTS
Shah & Modi
Features of deposits schemes under FCNR /NRE /NRO account
54
Particulars Non-Ordinary Rupee Account (NROAccount)
Non-Resident (External) Rupee Account Scheme (NRE Account)
Foreign Currency (Non-Resident) Account (Bank) (FCNR(B) Account)
Loan – to third parties
Loans / overdrafts toR / firms / Indiancompanies againstsecurity of FD in NROaccount subject toconditions
Fund based / non-fund bases to R / firms / Indiacompanies against security of FD in NRE accountsubject to conditions
Same as NRE account
Loan –outside India
Not allowed Authorised dealers may allow theirbranches/correspondents outside India to grantloans to or in favor of non-resident depositor orthird parties at the request of depositor for bonafide purpose except for purpose of relending orcarrying on agricultural/plantation activities or forinvestment in real estate business against securityof funds held in NRE accounts in India and alsoagree for remittance of the funds from India, ifnecessary, for liquidation of the outstanding.
Same as NRE account
CHARTERED ACCOUNTANTS
Shah & Modi
Features of deposits schemes under FCNR /NRE /NRO account
55
Particulars Non-Ordinary Rupee Account (NRO Account)
Non-Resident (External) Rupee Account Scheme (NRE Account)
Foreign Currency (Non-Resident) Account (Bank) (FCNR(B) Account)
Change of residential status of the account holder
NRO accounts may bedesignated as residentaccounts on the return ofthe account holder toIndia for any purposeindicating his intention tostay in India for anuncertain period.Likewise, when a residentIndian becomes a personresident outside India, hisexisting resident accountshould be designated asNRO account.
NRE accounts should bedesignated as residentaccounts or the funds heldin these accounts may betransferred to the RFCaccounts, at the option ofthe account holder,immediately upon thereturn of the account holderto India for taking upemployment or on changein the residential status.
In case account holderbecomes resident, depositsmay be allowed tocontinue till maturity atthe contracted rate ofinterest, if so desired byhim.AD Banks should convertthe FCNR(B) deposits onmaturity into residentrupee deposit accounts orRFC account, at the optionof the accountholder.
CHARTERED ACCOUNTANTS
Shah & Modi
Deposits under FCNR /NRE /NRO account
Interest on NRO deposit would be non repatriableand would be taxable.
Interest on NRO A/c should be regarded as investment
income and hence 20% rate should apply. (AAR no.784 dated
17th December, 2008 in the case Dr. Virendrakumar Raina)
In case NRI is able to access treaty entered by India and if
treaty rate is lower than 20% such lower rate can be adopted.
For e.g. UAE treaty provides for 12.5% withholding tax on
interest
56
CHARTERED ACCOUNTANTS
Shah & Modi
Transfer from NRO to NRE A/c
NRI shall be eligible to transfer funds from NRO
Account to NRE Account
overall ceiling of USD one million per financial
year subject to payment of taxes.
{A. P. (DIR Series) Circular No.117 dated May 07,
2012}
15 CA- CB is required
CHARTERED ACCOUNTANTS
Shah & Modi
Investment by way of deposits to proprietorship concern, partnership firm & companies on non-
repatriation basis from NRIs or PIOs
Schedule 7 – FEMA Notification No. 5 (R) – Acceptance ofDeposit Regulations
Investment in deposits by NRIs will be on nonrepatriation basis.
The maturity period of deposit shall not exceed 3 years
The amount of deposit shall be received by debit toNRO account only, provided that the amount of thedeposit shall not represent inward remittances ortransfer of funds from NRE/FCNR(B) accounts intothe NRO account. (substituted by FEM(Deposit)(Amendment) Regulations, 2004.)
58
FOREIGN CURRENCY ACCOUNTS BY A PERSON RESIDENT
IN INDIA
FEMA NOTIFICATION NO. 10(R) &
MASTER DIRECTION NO. 14
CHARTERED ACCOUNTANTS
Shah & Modi
Exchange Earners Foreign Currency(EEFC) Account in India
FEMA Notification No. 10(R)/2015-RB dated January 21, 2015 – Who can open, hold and maintain an EEFC Account – any person
resident in India subject to certain conditions.
Limits – 100% of foreign exchange earnings can be credited to EEFCAccount.
Permissible Credits –a) Inward remittance through normal banking channels.
b) Foreign exchange payment received by 100% EOU or unit in ExportProcessing Zone or Software Technology Park or Electronic Hardware Parkfor aupply of goods to similar such units or units in Domestic Tariff Area andvice versa.
c) Payment received by exporter from an acocunt maintained with AD Bank forpurpose of counter trade.
d) Advance received against exports of goods or services.
e) Payment received for export of goods and services from India, out of fundsrepresenting repayment of State Credit in U.S. dollar held in the account ofBank for Foreign Economic Affairs, Moscow, with AD in India;
CHARTERED ACCOUNTANTS
Shah & Modi
Exchange Earners Foreign Currency(EEFC) Account in India
FEMA Notification No. 10(R)/2015-RB dated January 21, 2015 –e) Professional earnings including director’s fees, consultancy fees, lecture fees,
honorarium and similar other earnings received by a professional byrendering services in his individual capacity
f) Payments received in foreign exchange by an Indian ‘start up’ or any otherentity as may be notified by RBI in consultation with central government,arising out of exports/sales made by the said entity or its overseassubsidiaries, if any.
g) Payments received through international credit card for whichreimbursement will be provided in foreign exchange may be regarded as aremittance through banking channels
h) Interest earned on funds held in the account.
i) Recredit of unutilised foreign currency earlier withdrawn from the account
j) Amount representing repayment by the account holder’s importer customer,of loan/advances granted, to the exporter holding such account
k) Representing the disinvestment proceeds received by the resident accountholder on conversion of shares held by him to ADRs/GDRs under the DRScheme, 2014 approved by Government of India (GOI).
CHARTERED ACCOUNTANTS
Shah & Modi
Exchange Earners Foreign Currency(EEFC) Account in India
FEMA Notification No. 10(R)/2015-RB dated January 21, 2015 – Permissible Debits –
a) Payments for current account transactions and all permissible capital accounttransactions.
b) Payment for goods purchased from 100% EOU or units in Export processingZone or Software Technology Parks or Electronic Hardware TechnologyParks.
c) Payment of customs duty.
d) Trade related loans and advances by exporter holding such account to hisimporter customer outside India;
e) Payment in foreign exchange to a person resident in India for supply of goodsand services including payment for airfare and hotel expenditure
No resitriction on withdrawal in rupee of funds in EEFC.
Amount withdarwn in rupee shall not be eligible for conversion into foreigncurrency and for re-credit to EEFC.
Close relatives can be added as joint holder on ‘former or survivor’ basis.
Close relatives not eligible to operate the account during lifetime.
CHARTERED ACCOUNTANTS
Shah & Modi
Resident Foreign Currency (RFC) Account in India
FEMA Notification No. 10(R)/2015-RB dated January 21, 2015 - A personresident in India may open, hold and maintain with AD in India a RFCaccount out of foreign exchange -
Received as pension or any other superannuation or other monetarybenefits from his employer outside India; or
Realised on conversion of assets referred to in section 6(4) of the act andrepatriated to India; or
Received or acquired as gift or inhertiance from a person referred to inSection 6(4) of the Act; or
Acquired or received before 8th July 1947 or any income arising oraccruing thereon which is held outside India by any person in pursuanceof general or special permission of RBI or acquired as gift or inheritancetherefrom; or
Received as proceeds of life insurance policy claims/maturity/surrendervalues settled in foreign currency from an insurance company in Indiapermitted to undertake life insurance business by the IRDA
CHARTERED ACCOUNTANTS
Shah & Modi
Resident Foreign Currency (Domestic) Account in India
FEMA Notification No. 10(R)/2015-RB dated January 21, 2015 - A personresident in India may open, hold and maintain with AD in India a RFC(Domestic) account out of foreign exchange acquired in form of currencynotes, bank notes and travellers’ cheques as under-
by way of payment for services not arising from any business in oranything done in India while on a visit to any place outside India; or
from any person not resident in India and who is on a visit to India, ashonorarium or gift or for services rendered or in settlement of any lawfulobligation; or
by way of honorarium or gift while on a visit to any place outside India; or
represents the unspent amount of foreign exchange acquired by him froman authorized person for travel abroad; or
as gift from a ‘close relative’ as defined in section 2(77) of the CompaniesAct, 2013; or
by way of earning through export of goods/services, or as royalty,honorarium or by any other lawful means; or
CHARTERED ACCOUNTANTS
Shah & Modi
Resident Foreign Currency (Domestic) Account in India
representing the disinvestments proceeds received by the residentaccountholder on conversion of shares held by him to ADRs/GDRs underDR Scheme, 2014 approved by the Government of India; or
by way of earnings received as the proceeds of life insurance policyclaim/maturity/surrender values settled in foreign currency from aninsurance company in India permitted to undertake life insurancebusiness by IRDA.
The account shall be a CURRENT ACCOUNT.
It shall not bear interest.
No ceiling on balances in the account.
Funds can be used towards Current Account Transactions and permissibleCapital Account Transactions.
CHARTERED ACCOUNTANTS
Shah & Modi
Foreign Currency Accounts in IndiaFollowing can open, maintain and hold a Foreign Currency Account in India:
An Exporter undertaking construction contract or turnkey project outsideIndia or providing services or engineering goods from India on deferredpayment.
Indian Agent of a Shipping or Airline Company incorporated outside formeeting local expenses in India.
Ship manning / crew managing agencies for purpose of undertakingtransactions in ordinary course of its business.
Project Office of Foreign Company in India.
An Indian Company receiving FDI. Indian investee company should haveimpending foreign currency expenditure and the account shall be closedimmediately after the requirements are completed and in no case shall beoperational for more than six months from the date of opening of such account.
AD in India may allow opening temporary foreign currency accounts byorganizers of international seminars, conferences, conventions etc. forholding such events in India for the receipt of delegate fees and paymenttowards expenses including payment to special invitees from abroad.
CHARTERED ACCOUNTANTS
Shah & Modi
Foreign Currency Accounts outside India
Following can open, maintain and hold a Foreign Currency Account outsideIndia:
Indian Firm or Body Corporate in name of its office or its branch outsideIndia or representative outside India for purpose of normal businessoperations of office or branch subject to following conditions:
a) Branch / office has been set up for conducting normal business activityof Indian entity.
b) Total remittances to all accounts in accounting year shall not exceed:
15% of average annual sales/income or turnover of Indian entityduring last two financial years or 25% of net worth (whichever ishigher) – for meeting initial expenses of branch or office
10% of average annual sales/income or turnover of Indian entityduring last financial year - for meeting recurring expenses
c) For remittances through funds held in EEFC account of Indian entity.
CHARTERED ACCOUNTANTS
Shah & Modi
Foreign Currency Accounts outside India
d) Purchase of office equipment and other assets for normal business ofbranch or office will not be treated as capital account transaction.
e) Account to be closed within six months if branch or office is not set upor within one month of closure of overseas branch/office or where norepresentative is posted within six months and funds shall berepatriated to India.
CHARTERED ACCOUNTANTS
Shah & Modi
Foreign Currency Accounts outside India
Following can open, maintain and hold a Foreign Currency Account in India:
An Exporter – who has undertaken construction contract or turnkey projectoutside India or who is exporting services or engineering goods from India ondeferred payment terms.
An Indian Party for Overseas Direct Investment subject to certainconditions.
An Indian Start up having subsidiaries overseas – for crediting foreignexchange earnings out of exports/sales made by said entity and / orreceivables arising out of exports/sales made by subsidiary.
Funds raised by way of External Commercial Borrowings (ECB) or throughAmerican Depository Receipts (ADRs) or Global Depository Receipts(GDRs) - pending their utilization or repatriation to India, be held in depositsin foreign currency accounts with bank outside India.
Shipping or Airline Company incorporated in India – for undertakingtransactions in ordinary course of business.
Resident Individuals - for making remittance under Liberalised RemittanceScheme (LRS).
CHARTERED ACCOUNTANTS
Shah & Modi
Foreign Currency Accounts outside India
A person resident in India who has gone abroad for studies or who is on avisit to a foreign country - provided that all the credits from India into theaccount shall be in accordance with the Act, rules and regulations made thereunder and on his return to India, after completion of his studies, such anaccount will be deemed to have been opened under the LRS.
A person resident in India who has gone out of India to participate in anexhibition/trade fair outside India - for crediting the sale proceeds of goodson display in the exhibition/fair. The balance in the account is repatriated toIndia through normal banking channels within one month from the date ofclosure of the exhibition / trade fair.
A citizen of a foreign state resident in India, being an employee of a foreigncompany or a citizen of India, employed by a foreign company outside Indiaand in either case on deputation to the office/branch/subsidiary/joint ventureof such foreign company - receive the whole salary payable to him for theservices rendered to the office/branch/subsidiary/joint venture in India ofsuch foreign company, by credit to such account, provided tax under IncomeTax Act, 1961 is paid on the entire salary as accrued in India.
CHARTERED ACCOUNTANTS
Shah & Modi
Foreign Currency Accounts outside India
A citizen of foreign state resident in India, being in employment with anIndian company - remit the whole salary received in India in rupees to suchaccount for services rendered to such Indian Company, provided tax underIncome Tax Act, 1961 is paid on the entire salary as accrued in India.
CHARTERED ACCOUNTANTS
Shah & Modi
Crystallization of Inoperative Foreign Currency Deposits
FEMA Notification No. 10A/2014-RB dated March 21,2014 Deposit means and includes account balances or deposit of money with
an Authorised Bank.
If a foreign currency denominated deposit (with fixed maturity)remains inoperative for a period of three years or more, AD Bankshall convert the balances lying in foreign currency into Indianrupees at the end of third year.
In case of a foreign currency denominated deposit (with no fixedmaturity) remaining inoperative for a period of three years ormore, after giving three month notice to depositor AD Bank shallconvert the balances lying in foreign currency into Indian rupeesat the end of the noticeperiod.