OVERVIEW OF FEMA

Shah & ModiCHARTERED ACCOUNTANTS

OVERVIEW OF FEMA

CVO CA ASSNon

11th June 2010

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CHARTERED ACCOUNTANTSShah & Modi

PREAMBLE TO FEMA Post liberalization (i.e. New Industrial policy of

1991) there was need to remove shackles of regulatory and legal provisions

There was need to take various steps to make ‘New Industrial Policy’- workable and meaningful.

Industrial licensing was made pragmatic and objective-oriented and

It was decided to review provisions of FERA Intention was to bring provisions of FERA so as

make it fall in line with emerging trends of liberalization so as to remove obstacles in the inward flow of foreign exchange and foreign investment

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STRUCTURE OF FEMA FEMA has 49 sections of which 9 (section 1 to

12) are substantive and the rest are procedural/ administrative

Section 46 of the Act grants power to Central Government to makes rules

Section 47 of the Act grants power to RBI to make regulations to implements its provisions and the rules made there under

Thus RBI is entrusted with the administration and implementation of FEMA

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SUBSTANTIVE PROVISION Section 1 – application and commencement of

the Act Section 2 – important definitions e.g. Authorized

person, person, person resident in India etc Section 3 – Power to RBI for giving general or

special permission in respect of transactions involving foreign exchange or any receipt or payments between resident and non- resident

Section 4 – Prohibits a person resident in India to acquire, hold, own, possess or transfer any foreign exchange, foreign security or immovable property situated outside India except as provided in the Act

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SUBSTANTIVE PROVISION Section 5 - Permits any person to sell or buy foreign

exchange to or from an authorized person on account of any current account transaction

Section 6 – Selling or drawing foreign exchange to or from an authorized dealer for capital account transactions

Section 7 – Exporter of goods and services shall furnish declaration to RBI or to any other authority

Section 8 – Realization and repatriation of foreign exchange

Section 9 – Exemption from realization and repatriation of foreign exchange in certain cases

Sec 10(5)- A.P. to require person to make such declaration and to give such information to check that transaction will not involve any contravention of FEMA including directions under FEMA

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SOME OF THE IMPORTANT

DEFINITIONS UNDER FEMA Authorised Person Capital Account Transactions Current Account Transactions Export Person Person Resident in India Person resident outside India Security Transfer

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ANALYSIS OF SEC 3 OF FEMA Sec 3- Dealings in Foreign Exchange: Save as otherwise provided in the Act- No person

shall Deal in or transfer any foreign exchange or

foreign security to any person not being an authorised person

Analysis of Sec 3(a): Deal in is a wide term and should include-

purchase, acquire, borrow, sell or otherwise transfer or lend or to exchange with (FERA’s corresponding Sec 8(1) had expansive meaning which specifically all these types of transactions)

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3(b)-no person shall- Make any payment to, or for the credit of Any person resident outside India (NR) in any

manner Intention is to prohibit direct and indirect

payment to NR

ANALYSIS OF SEC 3 OF FEMA

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3(c) Receive otherwise through an A.D. any payment

by order or on behalf of any NR in any manner Expln to above- where a resident receives any

payment without corresponding inward remittance than such payment would be regarded as having been received otherwise than through authorised person

3(d) enter into any 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 by any person

ANALYSIS OF SEC 3 OF FEMA

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DIFFERENCE IN

IMPLEMENTATION

OF IT ACT & FEMA Under Income Tax, issue is of taxability of

income which is determined for the full year, therefore generally amendments are annual

Whereas FEMA regulations are for undertaking transaction (generally between Resident & Non Resident) itself & therefore clarity at the time of undertaking transaction is a must

Therefore amendments keep pace with changes taking place in economy

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CURRENT & CAPITAL ACCOUNT

TRANSACTION Capital A/c transactions means a transaction

which alters assets or liabilities including contingent liabilities outside India of person resident in India and vice-versa. It’s a economic definition rather than accounting or legal definition

Current A/c transaction - transaction other than a capital a/c transaction

Current A/c transactions are freely permitted unless prohibited, they are regulated by Central Government

Capital A/c transactions are prohibited unless generally permitted, they are regulated by RBI

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CURRENT & CAPITAL ACCOUNT

TRANSACTION FEMA looks transaction from Balance of payment

position of Country For Example Import of machinery on payment of cash, from

FEMA perspective it is current a/c transaction Machinery is purchased on hire, from FEMA

perspective it is capital a/c transaction, there is an obligated to make future payment to the non-resident

Consideration for goods & Services – Current A/c Transaction represents a creation or acquisition of

wealth shares, loans or immovable properties – Capital A/c

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CAPITAL ACCOUNT

TRANSACTION

Section 6(3) of FEMA, prescribes the class of capital a/c transactions which are regulated

Every transaction in this section has a corresponding notification which regulates that particular transaction

Transactions not included in section 6(3) can be regulated by the RBI in consultation with the Central Government, as per section 6(2)

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TRANSACTIONS SPECIFIED IN SEC. 6(3)RELEVANT

NOTIFICATION

Transfer or issue of any foreign security by a person resident in India

Notification 120

Transfer or issue of any security by a person resident outside India

Notification 20

Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India

Notification 2

Any borrowing or lending in foreign exchange in whatever form or by whatever name called

Notification 3

Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India

Notification 4

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TRANSACTIONS SPECIFIED IN SEC. 6(3)RELEVANT

NOTIFICATIONDeposits between persons resident in India and persons resident outside India

Notification 5

Export, import or holding of currency or currency notes

Notification 6

Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India

Notification 7

Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India

Notification 21

Giving of a guarantee or surety in respect of any debt , obligation or other liability incurred-

i. By a person resident in India and owed to a Person resident outside India, or

ii.By a person resident outside India.

Notification 8

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CERTAIN OTHER VERY

IMPORTANT SECTIONS Section 6(4) – a person resident in India may hold,

own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India

Section 6(5) – a person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India

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NOTIFICATION UNDER FEMA RBI had initially issued 25 notifications, covering

capital account transaction prescribed in Sec 6(3) & certain miscellaneous provisions

15 related to capital account transactions, 1 on Export of goods and services and 9 for other regulations

The number as on date stands at 200 notifications The same term may be defined differently in

different notificationsE.g. Person of Indian Origin (PIO) is defined differently in 3 notifications namely: FEMA 13/2000-RB pertaining to remittance of assets FEMA 21/2000-RB pertaining to the acquisition and transfer of

immovable property in India FEMA 24/2000-RB pertaining to investment in a firm or

proprietary concern in India

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DEFINITION OF PIODefinition under FEMA 13/2000 (Remittance of Assets):-

‘Person of Indian Origin (PIO)’ means a citizen of any country other than Bangladesh or Pakistan if

a) He at anytime 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);

orc) The person is a spouse of an Indian citizen or a

person referred to in sub-clause (a) or (b);

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DEFINITION OF PIODefinition under FEMA 21/2000 (Acquisition and transfer of immovable property in India):-‘Person of Indian Origin (PIO)’ means 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 India passport;or

b) who or either of whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955)." (Recently included vide Notification No.200 dated October 5, 2009)

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DEFINITION OF PIODefinition under FEMA 24/2000 (Investment in Firm or proprietary concern in India):-‘Person of Indian Origin (PIO)’ means a citizen of any country 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 grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955);

orc) The person is a spouse of an Indian citizen or a person

referred to in sub-clause (a) or (b);

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NOTIFICATIONS UNDER FEMA.. (CONTD..)

Notification FEMA 1/2000-RB dated 3-5-2000: This notification relates to permissible capital

account transaction Capital account transactions of a person may be

classified under the following heads, namely-A. Transaction, specified in Schedule I, of a person

resident in India B. Transactions, specified in Schedule II, of a person

resident outside India

Subject to the provisions of the Act or the rules or the regulations or directions or orders made or issued there under, any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction specified in the Schedules

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CONTINUED..

Schedule I: Classes of capital account transactions of persons resident in India

a) Investment by a person resident in India in foreign securities

b) Foreign currency loans raised in India and abroad by a person resident in India

c) Transfer of immovable property outside India by a person resident in India

d) Guarantees issued by a person resident in India in favour of a person resident outside India

e) Export, import and holding of currency/currency notes

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

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g) Maintenance of foreign currency accounts in India and outside India by a person resident in India

h) Taking out of insurance policy by a person resident in India from an insurance company outside India.

i) Loans and overdrafts by a person resident in India to a person resident outside India.

j) Remittance outside India of capital assets of a person resident in India.

k) Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.With effect from September 26, 2007, a resident individual may draw foreign exchange up to USD 2,00,000 per financial year, for a capital account transaction specified in this Schedule I (Proviso to Reg. 4 (a)).

CONTINUED..

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If the drawal of foreign exchange by the resident individual exceeds USD 2,00,000 per financial year, then the limits specified in the particular regulations which are relevant to that particular transaction, shall apply to such drawal. (Proviso to Reg. 4(a))Note: No part of the foreign exchange drawn as per this proviso shall be remitted to countries notified as non-cooperative countries and territories by Financial Action Task Force (FATF).Schedule II: Classes of capital account transactions 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; &

CONTINUED..

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ii. Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India.

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

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

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

e) Deposits between a person resident in India and a person resident outside India.

f) Foreign currency accounts in India of a person resident outside India.

g) Remittance outside India of capital assets in India of a person resident outside India.

CONTINUED..

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PROHIBITED CAPITAL ACCOUNT

TRANSACTIONSNo person resident outside India shall make investment

in India, in any form, in any Company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage-

i. In the business of chit fund, orii. As Nidhi Company, oriii. In agricultural or plantation activities, oriv. In real estate business*, or construction of farm

houses, orv. In trading in Transferable Development Rights (TDRs)* For the purpose of this regulation ‘real estate business’

shall not include development of townships, construction of residential/commercial premises, roads or bridges

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CURRENT ACCOUNT

TRANSACTIONS Current A/c transaction is a transaction other

than a capital a/c transaction As per Foreign Exchange Management (Current

Account Transactions) Rules, 2000, current account transactions are divided into 3 schedules:-

Schedule I – Transactions contained in this schedule are prohibited

Schedule II – Transactions contained in this schedule require prior approval of Government of India

Schedule III – Transactions contained in this schedule require prior approval of the Reserve Bank

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CONTINUED..Some examples are:Schedule I :1. Remittance out of lottery winnings2. Remittance of income from racing/riding etc., or any

other hobby3. Remittance for purchase of lottery tickets,

banned/prescribed magazines, football pools, sweepstakes etc

Schedule II:1. Cultural tours2. Remittance of container detention charges exceeding

the rate prescribed by Director General of Shipping

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Schedule III:1. Gift remittance exceeding US$ 5,000 per

remitter/donor per annum2. Donation exceeding US$ 10,000 per remitter/ donor

per annum3. Release of exchange for meeting expenses for

medical treatment abroad exceeding the estimate from the doctor in India or hospital or hospital/doctor abroad.

Note: Drawal of foreign exchange by resident individuals towards remittance of gift or donations as per this Schedule III shall be within the limit specified under the proviso of Reg. 4 (i.e. USD 2,00,000)

CONTINUED..

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RESIDENTIAL STATUS UNDER

FEMA Under FEMA residential status is of two types:

Person resident in India and Person resident outside India

FEMA’s predecessor Foreign Exchange Regulation Act (FERA) considered citizenship as the deciding factor

FEMA lays emphasis on ‘residing’ which denotes permanency

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DEFINITION

Section 2(v) of FEMA defines ‘person resident in India’ as follows 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;

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(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

Section 2(w) defines ‘person resident outside India’ means a person who is not resident in India

DEFINITION

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EXPLANATIONS OF DEFINITION Person to be resident in India, has to reside in India

for more than 182 days during the previous financial year

Exclusion to this is - if a person stays outside India for employment, for vocation or for any other purpose for uncertain period, then even if he has resided in India for more than 182 days will become a ‘person resident outside India’

Moreover a person to be treated as person resident in India he has to satisfy not only the condition of period of stay (i.e. 182 days) but has to also comply with the conditions of the ‘purpose’ of stay i.e. for taking up employment, carrying on business or vocation in India or for any other purpose which would indicate his intention to stay in India for an uncertain period

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EXPLANATIONS OF DEFINITION RBI may ignore the arithmetic condition (i.e. of 182

days) and treat the person who comes to or stays in India for any of the three purposes set out in section 2(v)(i)(B) as ‘person resident in India’ even though he may not have resided in India for a period of 182 days or more during the preceding financial year. However legal tenability of such a view cannot be said to be free from doubt.

RBI has a very narrow approach towards non resident acquiring immovable property in India. It gives a weighted significance to the arithmetic condition of staying in India for more than 182 days during the preceding financial year. (FAQs on Immovable Property Acquisition)

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FAQ ON IMMOVABLE PROPERTY Q.37. What is meant by a person resident in India?

Under FEMA, a person resident in India is defined as a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April-March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as `a person resident in India' under FEMA, a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose / intention of stay

Q.39. who can determine whether a person is resident in India or not? Reserve Bank does not determine the residential status. Under

FEMA, residential status is determined by operation of law. The onus is on an individual to prove his / her residential status, if questioned by any authority

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