Foreign Exchange Management Act (FEMA) Rules

FEMA is a regulatory mechanism that enables the Reserve Bank of India to pass regulations and the Central Government to pass rules relating to foreign exchange in tune with the Foreign Trade policy of India.

This Act is applicable to all parts of India i.e it applies to any transaction that takes place in India by any person residing in India at the time of transaction. It is also applicable to all branches, offices and agencies outside India owned or controlled by a person who is resident of India.

  • Foreign Exchange Management (Current Account Transactions) Rule, 2000
  • Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000
  • Foreign Exchange Management (Transfer or Issue of any Foreign Security) regulations, 2004
  • Foreign Exchange Management (Foreign currency accounts by a person resident in India)Regulations, 2000
  • Foreign Exchange Management (Acquisition and transfer of immovable property in India) regulations, 2000
  • Foreign Exchange Management (Establishment in India of branch or office or other place of business) regulations, 2000
  • Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000
  • Foreign Exchange Management (Export of Goods and Services) regulations, 2000
  • Foreign Exchange Management (Realisation, repatriation and surrender of Foreign Exchange)regulations, 2000
  • Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000
  • Foreign Exchange ( Adjudication Procedure and Appeals) rules
  • Foreign Contribution (regulation) Act, 2010 (FCRA)

Residential status is the most important factor for determining the applicability of the Act. The persons that are covered under the Act are Persons resident in India, Non-resident Indian (NRI), Persons resident outside India, Overseas Corporate Body (OCB) and Persons of Indian Origin (PIO)

Note: Overseas Corporate Body means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least 60% by non-resident Indians and includes overseas trust in which not less than sixty percent beneficial interest is held by Non-resident Indians directly or indirectly but irrevocably.

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.

(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.

Classes of capital account transactions of persons resident outside India

(a) Investment in India by a person resident outside India,

(i) issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and

(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.

3 stage of FEMA compliances:

  • Before undertaking the transaction.
  • While undertaking the transaction
  • After undertaking the transaction

Realisation and repatriation of Foreign exchange

Duty of persons to realise foreign exchange due:-

A person resident in India to whom any amount of foreign exchange is due or has accrued shall, save as otherwise provided under the provisions of the Act, or the rules and regulations made thereunder, or with the general or special permission of the Reserve Bank, take all reasonable steps to realise and repatriate to India such foreign exchange, and shall in no case do or refrain from doing anything, or take or refrain from taking any action, which has the effect of securing –

  1. that the receipt by him of the whole or part of that foreign exchange is delayed; or
  2. that the foreign exchange ceases in whole or in part to be receivable by him.

MANNER OF REPATRIATION:

  1. sell it to an authorised person in India in exchange for rupees; or
  2. retain or hold it in account with an authorised dealer in India to the extent specified by the Reserve Bank; or
  3. use it for discharge of a debt or liability denominated in foreign exchange to the extent and in the manner specified by the Reserve Bank.

PERIOD FOR SURRENDER OF REALISED FOREIGN EXCHANGE BY NON- RESIDENT:

If received for rendering of services, settlement of any lawful obligation or on income on assets held outside India, settlement of gifts or receive as inheritance – Get it exchange from Authorised person within 7 days of receipt.  

If received in any other manner- within 90 days from the day of receipt.

And if any person purchased or acquired any foreign exchange for the permissible transaction and if any balance amount left then he must surrender the balance amount to the Authorised person within 60 days from the date of its acquisition or purchase.

If acquire for foreign visiting(Tourism purpose):  Then the unused foreign exchange must be surrendered to Authorised person;

Within 90 days from the date of return to India- If foreign exchange is in form of currency, notes and coins.

Within 180 days from the date of return to India- If it is in form of travellers cheques.

PERIOD FOR SURRENDER OF REALISED FOREIGN EXCHANGE BY RESIDENT:

Shall surrender the received/ realised/ unspent/ unused foreign exchange whether in the form of currency notes, coins and travellers cheques, etc. to an authorised person within 180 Days from the date of such receipt/ realisation/ purchase/ acquisition or date of his return to India, as the case may be.

Taxability on foreign transaction:

  • Currency transaction tax
  • Service tax
  • Gst

GST ON FOREIGN EXCHANGE TRANSACTION:

  • Amount of foreign transaction value upto Rs. 1,00,000

Value deemed for (purchase or sales) transaction shall be 1% of gross transaction of foreign currency subject to a minimum amount of Rs. 250

GST will charge 18% on deemed value subject to a minimum of of Rs. 45.

  • Amount of foreign transaction value above Rs. 1,00,000 and upto Rs. 10,00,000

Value deemed for (purchase or sales) transaction shall be Rs. 1000+ 0.5% of gross transaction of foreign currency in excess of Rs. 1,00,000.

GST will charge 18% on deemed value .

  • Amount of foreign transaction value exceed Rs. 10,00,000

Value deemed for (purchase or sales) transaction shall be 5,500+ (0.1% of gross transaction of foreign currency in excess of Rs. 10,00,000) but subject to maximum Rs. 60,000

GST will charge 18% on deemed value .

Penalties prescribed under section 13:

  • Where amount is quantifiable- up to thrice the sum involved in contravention.
  • Where amount is not quantifiable- Upto Rs. 2 lakh
  • And if contravention is continuing one- further penalty may extend Rs. 5000 per day starting from the day of contravention till the contravention continues.

METHODS TO DEAL WITH CONTRAVENTION:

  1. COMPOUNDING
  2. ADJUDICATION
  3. APPEALS
  4. FERA CONTRAVENTIONS
  5. CONTRAVENTION BY AUTHORISED PERSON

COMPOUNDING OF CONTRAVENTION:

Any contravention under section 13 may on the application made by the person committing such contravention, be compounded within 180 days from the date of application by Directorate of Enforcement or by Reserve Bank of India.

Powers to compound (RESERVE BANK) :  

Sec.3 – Dealing in Foreign Exchange

Sec.4 – Holding of foreign currency  

Sec.5 – Current account transactions  

Sec.6 – Capital account transactions  

Sec.7 – Export of goods and services

Sec.8 – Realisation and repatriation of Foreign exchange

Sec.9 – Exemption from realisation & repatriation

Sec.10(6) – Mis-utilisation of FE

POWERS TO COMPOUND (DIRECTORATE OF ENFORCEMENT) :

Sec.3(a) i.e Hawala transactions

Detection of contravention:

Voluntary disclosure; Information from Ads;  Analysis of data; Market Intelligence; RBI’s inspections etc.

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