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Comparison of FERA & FEMA

FERA

FERA- AN ACT

To amend the law regulating certain payments, dealings in foreign exchange, effecting foreign exchange and import and export of currency, for the conservation of the foreign exchange resource of the country and the proper utilization thereof in the interests of the economic development of the country.

FERA

Regulated in India by the Foreign Exchange Regulation Act (FERA),1973.

Consisted of 91 sections.

FERA Emphasized strict exchange control.

Control everything that was specified, relating to foreign exchange

Law violators were treated as criminal offenders.

Aimed at minimizing dealings in foreign exchange and foreign securities.

Why FERA? FERA was introduced at a time when foreign exchange (Forex) reserves of the country were low, Forex being a scarce commodity.

FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI).

FERA primarily prohibited all transactions, except ones permitted by RBI.

Objectives To regulate certain payments.

To regulate dealings in foreign exchange and securities.

To regulate transactions, indirectly affecting foreign exchange.

To regulate the import and export of currency.

To conserve precious foreign exchange.

The proper utilization of foreign exchange so as to promote the economic development of the country.

FOREIGN EXCHANGEMANAGEMENT,1999[FEMA

FEMA is an act to consolidate and among the law relating to Foreign Exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of Foreign exchange market in India.

Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India.

The Objectives are as follows

To regulate impact and export of currency To regulate acquisition holding etc .of immovable property in India by NRIs. To regulate holding of property (immovable) outside India. To regulate certain payments. To regulate Foreign companies. To regulates dealing in FE and securities. To regulate the transactions indirectly affecting FE. To regulate employment of foreign nationals.

To converse the FE resources of the country and to utilize the same is the interest of the economic development of the country.

S TRUCTURE OF THE FEMA (ACT)

FEMA has in all 49 sections of which 9 (section 1 to 9) are substantive and the rest are procedural/administrative.

Thus RBI is entrusted with the administration and implementation of FEMA

The FEMA act extends to the whole of India. The main provision of the Act are as follows:

Section 2: Clarity on several definitions and terms used in the context of foreign exchange.

Section 3:Prohibits dealing in Foreign Exchange

Section 4 Holding of foreign Exchange Section 5 Current account Transaction Section 6 : Capital account Transaction Section 7: Export of Goods and ServicesSection 8 : Realisation of Repatriation and Foreign Exchange

Case study: KitesAllegations:1. Used foreign exchange meant for production work to meet personal expenses2. Carried junk film reels from India for the shoot but used fresh reels bought in the US3. Paid Spectrum Entertainment just $ 4.3 million against pending bills of $ 5.9 million

Background of case Production budget of Rs. 60 crore Sold for Rs. 110 crore in worldwide rights to the Reliance Group Film shot in Maldives, Mexico and the US Spectrum Entertainment hired by Roshan to manage all outdoor shoots of Kites in the US Reels were bought in US and cost Roshan Rs. 50 lakhs

evaluation1. The production house is gaining tax benefits showing personnel expenditure as creative expenses2. Evaded duty on Reels, bought from US, when returned to India3. Spectrum has all the challans of withdrawals by Roshan

conclusions1. The personal expense, if proved, must only invite minimal penalty of 3 times the duty evaded2. Spending of Rs. 50 lakhs in US is violation of FEMA and can invite penalty of upto 3 times the original amount applicable3. The Spectrum matter will not be taken up by the ED without a proper evaluation of the situation between the complainant & the Indian production house

Rule 3 read with Schedule I:Prohibited Transactions Pymt for travel to Nepal andor Bhutan Remittance out of income from : lottery winnings, or racingriding etc., or any other hobby; Remittance for purchase of : lottery tickets, or banned prescribed magazines, football pools, sweepstakes etc. Pymt of comm. on exports made towards equity investment in JV abroad of Indian Companies

Rule 4 read with Schedule II:Transactions with CG Approval Pymt of imports by a Govt. Deptt. or a PSU onCIF basis Cultural Tours Remittance of prize money sponsorship of sports activity abroad > US$ 1,00,000 (no restriction if pymt made by International National State level Sports Bodies) Pymt for health insurance from a company abroad

Rule 5 read with Schedule III:(if beyond limits)

Similarities between FERA & FEMA The Reserve Bank of India and central government would continue to be the regulatory bodies. Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure

ComparisonFERA & FEMA

DifferencesFERAFEMA

EmphasisOn regulation of foreign exchangeOn management of foreign exchange

SituationStringent controls were required on the use of foreign exchangeStringent controls are not required now

PermissionNeed to take permission of RBI in connection with remittancesNo need for seeking the permission of RBI except in case of Section 3

RestrictionsRestrictions on drawals of foreign exchange for the purpose current account transactionsSection 5 removes all restrictions on drawals of foreign exchange

ComparisonFERA & FEMA

D IFFERENCESFERAFEMA

PROVISIONSFERA consisted of 91 sections, and was morecomplexFEMA is much simple, and consist of only 49 sections.

FEATURESPresumption of negative intention (Mens Rea ) andjoininghandsinoffence(abatement)existed in FERAThese presumptions of Mens Rea and abatement have been excluded in FEMA

NEWTERMS FEMAINTerms like Capital Account Transaction, current Account Transaction, person, service etc. werenot defined in FERA.TermslikeCapitalAccountTransaction,currentaccountTransaction person, service etc., have been defined in detail in FEMA.

DEFINITION AUTHORIZEDPERSONOFDefinition of "Authorized Person" in FERA was a narrow one ( 2(b)The definition of Authorized person has been widened to include banks, money changes, off shore banking Units etc. (2 ( c )

MEANINGOF"RESIDENT"AS COMPARED WITH INCOME TAX ACT.There was a big difference in the definition of "Resident", under FERA, and Income Tax ActThe provision of FEMA, are in consistent with income Tax Act, in respect to the definition of term " Resident". Now the criteria of "In India for 182 days" to make a person resident has been brought under FEMA. Therefore a person who qualifies to be a nonresident under the income Tax Act, 1961 will also be considered a nonresident for the purposes of application ofFEMA, but viceaversa may not hold true.

PUNISHMENTAny offence under FERA, was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973Here, the offence is considered to be a civil offence only punishable with some amount of money as a penalty. Imprisonment is prescribedonly when one fails to pay the penalty.QUANTUM OF PENALTY.The monetary penalty payable under FERA, was nearly the five times the amount involved.Under FEMA the quantum of penalty has been considerablydecreasedtothreetimestheamount involved.APPEALAn appeal against the order of "Adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High CourtThe appellate authority under FEMA is the special Director ( Appeals) Appeal against the order of Adjudicating Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange." An appeal from an order of Appellate Tribunal would lie to the High Court.(sec 17,18,35)RIGHT OF ASSISTANCE DURINGLEGAL PROCEEDINGS.FERA did not contain any express provision on the right of on impleaded person to take legal assistanceFEMA expressly recognizes the right of appellant to take assistance of legal practitioner or chartered accountant (32)POWER OF SEARCH AND SEIZEFERA conferred wide powers on a police officer not below the rank of a Deputy Superintendent of Police toThe scope and power of search and seizure has been curtailed to a great extentComparisonFERA & FEMA

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