Foreign Exchange Management

Act, 1999 - An Overview

Presentation by: Sudha g. Bhushan

• To consolidate and amend the law relating to foreign exchange;

• Facilitating external trade and payments and

• Promoting orderly development and maintenance of forex market in India

• Introduced after repulsion of FERA, an Act to control, regulate, restrict or prohibit foreign exchange keeping in view the interest of economic development of the country

Objective of the FEMA, 1999

Notifications/Rules

Legal Provisions of

Foreign Exchange

Management

Foreign Exchange

Management Act,

1999

Circulars {AP (DIR

series)} Master Circular

Notifications/Regul

ations

Chapters Matters Sections

I Preliminary, Preamble and Definitions 1-2

II Regulation and management of Foreign Exchange

3-9

III Authorised Person 10-12

IV Contravention and Penalties 13-15

V Adjudication and procedure for appeal 16-35

VI Directorate of Enforcement 36-38

VII Miscellaneous Provisions 39-49

Description of Sections

• Residential Status

• Capital Account transactions

• Current account transaction

• Liberalized Remittance Scheme

• Bank Accounts

Important basic concepts

Residential Status

Section 2(v)

"person resident in India" means:-

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include:-

A) 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 other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

Residential Status

(B) a person who has come to or stays in India, in either case, 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, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(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;

Residential Status

• Mr Z had resided in India during the financial year 1999-2000.He left India on 1st August,2000 for united states for pursuing higher studies for 3 Years .What would be his residential status during financial year 2000-2001 and during 2001-2002.

• Toy is an Japanese company having several business units all over the world. It has a robotic unit with its head quarter in Mumbai and has a branch in Singapore. Headquarter at Mumbai controls the branch of robotic unit. What would be the residential status of robotic unit in Mumbai and that of Singapore Branch?

Example

• Miss is an air-hostess with the British Airways. She flies for 12 days in a month and thereafter a break for 18 days. During the break, she is accommodated of ―base‖ which is normally the city where the airways is headquartered. However ,for security consideration ,she was based on Mumbai. During the financial year ,she was accommodated at Mumbai for more than 182 days. What would be her residential status under FEMA?

Example

Capital Account Transactions

A transaction which alters:-

• The assets;

• Liabilities; including contingent liabilities,

outside India of persons resident in India

or assets and liabilities in India of persons resident outside India and includes transactions referred to in sub section (3) of Section 6.

• As per notification no.FEMA1/2000-RB dated 3rd May 2000 no person shall undertake or sell or draw FOREX to or from an authorised person for any capital account transaction except for the purposes specified in Schedule I and Schedule II

Capital account transaction

• Investment by a person resident in India in foreign securities;

• Foreign currency loans raised in India and abroad by a person resident in India;

• Transfer of immovable property outside India by a person resident in India;

• Guarantees issued by a person resident in India in favor of a person resident outside India;

• Export, import and holding of currency/currency notes;

• Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India;

• Maintenance of foreign currency accounts in India and outside India by a person resident in India;

• Taking out of insurance policy by a person resident in India from an insurance company outside India;

• Loans and overdrafts by a person resident in India to a person resident outside India;

• Remittance outside India of capital assets of a person resident in India;

Schedule I- for Persons resident in India

• Investment in security of body corporate in India.

• Acquisition and transfer of immovable property in India by a person resident outside India.

• Guarantee by a person resident outside India in favour of, or on behalf of a person resident in India.

• Import and export of currency. currency notes into /from India by a person resident outside India.

• Deposits between a person resident in India and a person resident outside India.

• Foreign currency accounts in India of a person resident outside India.

• Remittance outside India of capital assets in India of a person resident outside India.

Schedule II- for Persons resident outside India

• Amortisation of loan

• Depreciation of direct investment in the ordinary course of business

• Acquisition of transfer of immovable property in India on lease upto five years by a person resident in India.

• Acquisition or transfer of immovable property in India on lease up to five years by a person resident outside India.

• Holding, owning, transferring or investing in foreign currency, foreign security or any immovable property outside India by a person resident in India if the same was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

• Holding, owning, transferring or investing in Indian currency, security or any immovable property in India by a person resident outside India if the same was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

Capital account transaction - that cannot be prohibited

Current Account Transactions

Section 2(J)

"current account transaction" means a transaction other than a capital account transaction, and;

includes:-

(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

(ii) payments due as interest on loans and as net income from investments,

(iii) remittances for living expenses of parents, spouse and children residing abroad, and

(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and Children.

Current account transaction

• Section 5 of the Act:-

any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction.

Provided that the central government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.

Via Notification no. G.S.R.38(E) dated 3May 2000,Central Government has notified the rules to be called ―Foreign Exchange Management (Current Account Transaction) Rules, 2000.

Current account transaction

As per the notification

Drawal of Foreign Exchange is prohibited in following Cases

• Transactions specified in Schedule I

Examples:-

Remittance out of lottery winnings

Remittance of Income from racing/Riding etc

Payment related to call Back Services.

• a travel to Nepal and /or Bhutan

• a transaction with a person resident in Nepal or Bhutan.

Prohibited transactions

Transactions which require prior approval of the Central Government

Purpose of Remittance Ministry /Department of government whose approval is required

Cultural Tours Ministry of Human Resources Development, (Department of Education and culture)

Advertisement in foreign print media exceeding USD 10,000)

Ministry of Finance, (Department of Economic Affairs)

Remittance of prize e money / sponsorship of sports activity abroad by a person other than International / National / State Level sports bodies, if the amount involved exceeds USD 100,000.

Ministry of Human Resources Development (Department of Youth Affairs and Sports)

Release of exchange exceeding USD 10,000 in one calendar year, for one or more private visits to any country (except Nepal or Bhutan).

Gift remittance exceeding USD 5000 per remitter/Donor per annum

Donation exceeding USD 5000 per remitter/donor per annum.

Exchange facilities exceeding USD1,00,000 for persons going abroad for employment.

Release of foreign exchange, exceeding USD 25,000 to a person, irrespective of period of stay, for business travel, or attending a conference or specialised training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up.

Transaction for which approval of Reserve Bank of India

Remittance for maintenance of close relatives abroad

i. exceeding net salary (after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in 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 or subsidiary 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 on account of his employment or deputation of a specified duration ; the duration of which does not exceed three years, is a resident but not permanently resident

Transaction for which approval of Reserve Bank of India

• Release of foreign exchange, exceeding USD 25,000 to a person, irrespective of period of stay, for business travel, or attending a conference or specialised training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up.

Transaction for which approval of Reserve Bank of India

• Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/doctor abroad.

• Release of exchange for studies abroad exceeding the estimate from the institution abroad or USD 100,000, per academic year, whichever is higher.

• Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeding USD 25,000 or 5% of the inward remittance whichever is more

• Remittance exceeding USD 1,000,000 per project, for any consultancy service procured from outside India.

• Remittance exceeding USD 100,000 by an entity in India by way of reimbursement of pre incorporation expenses.

Transaction for which approval of Reserve Bank of India

Liberalised Remittance Scheme

• Authorised Dealers may freely allow remittances by resident individuals up to USD 200,000 per financial year for any permitted current or capital account transactions or a combination of both.

• This limit includes remittance towards gift and donation by a resident individual.

• Remittances under the scheme are allowed only in respect of permissible current or capital account transaction.

Liberalised Remittance

BANK ACCOUNTS

Classification Of

Account Available to

NON Resident

Non Resident (Foreign Currency)

Account FCNR-B A/C

Non Resident (ordinary) Account

NRO A/C

Non Resident (External) Rupee Account

NRE A/C

Type of bank accounts- Non residents

Any person resident outside India may open NRO account with an authorised dealer or an authorised bank for the purpose of putting through bonafide transactions denominated in Rupees, not involving any violation of the provisions of FEMA, rules, Regulations made thereunder.

The accounts may be maintained in the form of savings or current or term deposit accounts.

Non-resident Ordinary (NRO) Rupee Account

Debits Credits

• All local payments in rupees.

• Remittance outside India of current income like rent, dividend in India of the account holder

• Remittance up to USD one million, per financial year for all bonafide purposes to the satisfaction of the authorised dealer.

• Proceeds of remittance from outside India through normal banking channel received in foreign Currency which is fully convertible

• Foreign Currency-tendered by account holder during his temporary visit to India

• Transfers from rupee account of Non resident Banks.

• Legitimate dues in India of the account holder

Non-resident Ordinary (NRO) Rupee Account

• Non Resident Indians may open, with authorised banks in India, Non-resident (External) Accounts (NRE Accounts), designated in rupees.

• These accounts can be maintained in the form of savings, current or term deposit accounts.

• Opening of NRE Accounts jointly in the names of two or more non residents is permitted provided all the account holders are persons of Indian nationality or origin.

Non-resident external (NRE) Rupee Account

Debits Credits

•Local disbursements

•Remittance outside India.

•Transfer to NRE/FCNR accounts of the account holder

• Investment in shares / Securities / commercial paper of an Indian company of for purchase of immovable property in India.

•Remittances in Foreign Exchange

•Transfer from other NRE/FCNR account

•Refund when permissible payment was made from same account

•Maturity proceeds of Government Securities including National Plan etc.

•Proceeds of foreign currency by account holder during his temporary visit to India

Non-resident external (NRE) Rupee Account

• FCNR A/c: These accounts can be opened in four foreign currencies:

• Pounds Sterling;

• US Dollars;

• Japanese Yen;

• Euro.

• For the purpose of opening an account, remittance in foreign exchange, in the same currency, should be received in India

• Can be opened only as fixed deposits

• Principle and interest - remittable outside India

• Permissible debits and credits are same as NRE account.

FCNR Account

Classification

Of

Accounts available

to Residents

Exchange Earners

Foreign Currency

Account

Resident Foreign

Currency Account

Resident Foreign

Currency

(Domestic) Account

Type of bank accounts

• A person in India can open, hold and maintain with an authorised Dealer in India, a Exchange Earners Foreign Currency Account

• Credited with the 100% FOREIGN EXCHANGE EARNINGS

• No restriction on withdrawal in Indian Rupees

Exchange Earners Foreign Currency Account

• A person in India can open, hold and maintain with an authorised Dealer in India, a RESIDENT FOREIGN CURRENCY ACCOUNT, out of Foreign exchange

• Received as pension or any other superannuation or any other monetary benefit from employer outside India

• Realised on conversion of asset

• Received or acquired as gift or inheritance

• Received as the proceeds from life insurance policy settled in Foreign currency

Resident Foreign Currency A/C

• A resident individual may open, hold and maintain with an authorised Dealer in India, a RESIDENT FOREIGN CURRENCY (DOMESTIC) ACCOUNT, out of Foreign exchange

• acquired by him from an authorised person for travel abroad and represents the unspent amount thereof.

• acquired by him, while on visit to any place outside India, by way of payment for services.

• acquired by him, from any person not resident in India and who is on visit to India, as honorarium, gift, for services rendered abroad

• Acquired by him in settlement of any lawful obligation from any person not resident in India.

Resident Foreign Currency (Domestic) A/C

• Any person, contravening FEMA, shall be liable, upon adjudication, to a penalty up to

• three times the sum involved in such contravention, where such amount is quantifiable,

• up to Rupees Two hundred thousand, where the amount is not quantifiable.

• In addition, where such contravention is a continuing one, the person will be liable to further penalty, which may extend to Rupees Five thousand for every day after the first day, during which the contravention continues.

Contravention of FEMA

• Remittances to non-resident will be allowed to be made by the

authorised dealers on production of an undertaking by the

remitter and a certificate from a Chartered Accountant in the

formats prescribed by the Central Board of Direct Taxes,

Ministry of Finance, Government of India

Income tax clearance

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