FEMA 2023-24 PDF

ECONOMIC REGULATIONS MODULE 1 LAW RELATING TO FOREIGN EXCHANGE 1 Law relating to Foreign Exchange - Foreign Exchange Management Act, 2013-Objectives - definitions -Authorised Person- Foreign Exchange- Foreign Security- Repatriate to India -...

ECONOMIC REGULATIONS MODULE 1 LAW RELATING TO FOREIGN EXCHANGE 1 Law relating to Foreign Exchange - Foreign Exchange Management Act, 2013-Objectives - definitions -Authorised Person- Foreign Exchange- Foreign Security- Repatriate to India - Dealings and holding in foreign exchange. As per Article 246 of Constitution of India, the Parliament has exclusive power to make laws with respect to any of the matters enumerated in the Union List in the Seventh Schedule. The Foreign Exchange Management Act, 1999 can be traced to various entries in the Union List. Entry 16 of the Union List deals with foreign jurisdiction. Entry 36 of the Union List deals with Currency, coinage and legal tender; foreign exchange. Entry 37 of the Union List deals with Foreign loans and Entry 41 of the Union List deals with Trade and commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers. The legal framework for administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. Under the Foreign Exchange Management Act, 1999 (FEMA), which came into force with effect from June 1, 2000, all transactions involving foreign exchange have been classified either as capital account transactions or current account transactions. The object of the study is to familiarize the students with the overview of regulatory structure under Foreign Exchange Management Act, 1999. 2 HISTORICAL BACKGROUND A system of exchange control was first time introduced through a series of rules under the Defence of India Act, 1939 on temporary basis. As the foreign exchange crisis persisted for a long time Foreign Exchange Regulation Act, 1947 was enacted initially for a period of ten years. However, 10 years of economic development did not ease the foreign exchange constraint; FERA permanently entered the statue book in 1957. Subsequently, this Act was replaced by the Foreign Exchange Regulation Act, 1973 (FERA, 1973), which came into force with effect from January 1, 1974. In 1974, FERA was completely overhauled with all offences being considered as criminal offences with mens rea i.e. guilty mind. The Enforcement Directorate was empowered to arrest any person without even arrest warrant. In the 1990s, consistent with the general philosophy of economic reforms a sea change relating to the broad approach to reform in the external sector took place. In 1991 government of India initiated the policy of economic liberalization. Foreign investments in many sectors were permitted. This resulted in increased flow of foreign exchange in India and foreign exchange reserves increased substantially. In 1997, the Tarapore Committee on Capital Account Convertibility (CAC), constituted by the Reserve Bank, had indicated the preconditions for Capital Account Convertibility. The three crucial preconditions were fiscal consolidation, a mandated inflation target and, strengthening of the financial system. The Tarapore Committee had also recommended change in the legislative framework governing foreign exchange transactions. A Bill introduced in the Lok Sabha on 4 August, 1998 was referred to the Standing Committee on Finance which submitted it’s report to the House on 23 December ’98 with suggestion and modifications. As the 12th Lok Sabha was dissolved before any decision could be taken on the Bill, the Bill lapsed consequently. The Bill was again introduced in the 13th Lok Sabha on 25th October 1999 and was passed in the winter session of Parliament in 1999. The President Assent was received on 29th December, 1999. Finally FEMA came into force w.e.f. 1st June 2000. Accordingly, the Foreign Exchange Regulation Act (FERA) was repealed and replaced by the new Foreign Exchange Management Act (FEMA) with effect from June 2000. The philosophical approach was shifted from that of conservation of foreign exchange to one of facilitating trade and payments as well as developing orderly foreign exchange market. 3 OBJECTIVES Foreign Exchange Management Act, 1999 has replaced Foreign Exchange Regulation Act. 1973and it has come into effect from 1-6-2000. Following are the important objectives of FEMA- 1) To facilitate external trade and payments 2) To promote the orderly development and maintenance of foreign markets in India The foreign exchange regulations have been liberalised over the years to facilitate the remittance of funds both in and out of India. The changes have been introduced on a continuous basis in line with the government policy of economic liberalisation. Still, in few cases, specific approvals are required from the regulatory authorities for foreign exchange transactions/remittances. The foreign exchange regulations in India are governed by the Foreign Exchange Management Act, 1999 (“FEMA”). The apex foreign exchange regulatory authority in India is the Reserve Bank of India (“RBI”) which regulates the law and is responsible for all key approvals. FEMA is not only applicable to all parts of India but is also applicable to all branches, offices and set- ups outside India which are owned or controlled by a person resident in India. It also applies to all branches, offices and set-ups in India which are controlled or owned by person resident outside India. FEMA regulates all aspects of foreign exchange and has direct implications on external trade and payments. FEMA also impacts foreign nationals who are working in India or outside Thus, approach of FERA is radically different from FEMA, 1999 from conservation to facilitation and from control and regulation to management. Further FEMA is a civil law and the burden of proof under FEMA is on the enforcement agency and not on the implicated unlike FERA. Reserve Bank of India is the overall controlling authority in respect of FEMA. In addition to RBI, Directorate of Enforcement has also been formed for the implementation of FEMA. It may be noted that FEMA, 1999 contains only basic legal framework. Sec 46 of FEMA authorizes Central Govt. to make Rules and Sec. 47 authorizes RBI to make Regulations to carry out the provisions of the Act. Accordingly, the Central Govt. has issued number of Rules and RBI has issued number of Regulations for various purposes. The practical aspects are covered by these Rules and Regulations. OVERALL SCHEME OF FEMA FEMA makes provisions for dealings in foreign exchange. Broadly, all Current Account Transactions are free. However, Central Government can impose reasonable restrictions by issuing rules (Section 3 FEMA).Capital Account Transactions are permitted to the extent specified by RBI by issuing Regulations. (Section 6 of FEMA) 4 FEMA envisages that RBI shall have a controlling role in management of foreign exchange. Since RBI cannot directly handle foreign exchange transactions, it authorizes “Authorised Persons” to deal in foreign exchange. RBI has been empowered to issue directions to such “Authorised Persons” under Section 11. FEMA also makes provisions for enforcement, penalties, adjudication and appeal. The FEMA 1999 contains only basic legal framework. The practical aspects are covered in Rules made by Central Government and Regulations made by RBI. FDI Policy announced by Department of Industrial Policy & Promotion, Ministry of Industries and Commerce directly relevant to understanding the provisions of FEMA. Instructions/Guidelines etc. of Ministry of Finance and Securities and Exchange Board of India (SEBI) become relevant when (ECB) /ADR/GDR and capital market is involved. FEMA STRUCTURE The legislations, rules and regulations, governing Foreign Exchange Management are as under: FEMA contains 7 Chapters divided into 49 sections of which 12 sections cover operational part and the rest deals with contravention, penalties, adjudication, appeals, enforcement directorate, etc. CHAPTER I – Preliminary (Section 1&2) CHAPTER II- Regulation and Management of Foreign Exchange (Section 3 –9) CHAPTER III – Authorised Person (Section 10 –12) CHAPTER IV – Contravention and Penalties (Section 13-15) CHAPTER V – Adjudication and Appeal (Section 16- 35) 5 CHAPTER VI – Directorate of Enforcement (Section 36-38) CHAPTER VII- Miscellaneous (Section 39 – 49)  Rules made by Ministry of Finance under section 46 of FEMA (Subordinate or delegated Legislations)  Regulations made by RBI under section 47 of FEMA (Subordinate or delegated Legislations)  Master Direction issued by RBI on every year  Foreign Direct Investment policy issued by Department of Industrial Policy and Promotion.  Notifications and Circulars issued by Reserve Bank of India. Besides the FEMA, there are Set of Rules, Regulations and Master Directions under the Act to ensure effective implementation of the Act. IMPORTANT DEFINITIONS Authorized Person Sec. 2 (c) Authorized person means an authorized dealer, moneychanger, off-shore banking unit or any other person for the time being authorized by RBI to deal in foreign exchange or foreign securities. Foreign Exchange Sec. 2 (n) Foreign exchange means foreign currency and includes the following: 1) Deposits, credits and balance payable in any foreign currency; 2) Drafts, travellers' cheques, letters of credit or bill of exchanges expressed or drawn in Indian currency but payable in foreign currency; and 3) Drafts, travellers' cheques, letters of credit or bill of exchange drawn by banks, institutions or person outside India payable in Indian 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 foreign currency. Further, the term foreign security also includes security expressed in foreign currency but where redemption or any form of return such as interest or dividend is payable in Indian currency. Person Sec. 2 (u) Person includes an individual, a Hindu Undivided Family, a company, a firm, an association of persons or body of individuals, whether incorporated or not; any agency, office or branch owned or controlled by such persons. Further, it includes any other artificial person. 6 Person resident in India [Sec. 2 (v) Person resident in India means the following: 1) A person residing in India for more than 182 days during the course of preceding financial year but does not include the following: a) Person who has gone out of India or who stays outside India for any of the following purposes: i) For taking up employment outside India; ii) For carrying on a business or vocation outside India; iii) For any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period; b) Person who has come to India or who stays in India for any purpose other than the following purposes: i) For taking up employment in India; ii) For carrying on a business or vocation in India; iii) For any purpose in such circumstances as would indicate his intention to stay in India for an uncertain period; 2) Any person or body corporate registered or incorporated in India; 3) An office, branch or agency established in India which is owned or controlled by a person resident outside India; 4) An office, branch, or agency established outside India, which is owned or controlled by a person resident in India. Person resident outside India Sec. 2 (w) It means a person who is not resident in India Repatriate to India Sec. 2 (v) Repatriate to India means the realized foreign exchange should be sold to an authorized person in India in exchange for rupees. It also includes the holding of realized amount in an account with an authorized person in India to the extent notified by the Reserve Bank and includes use of the realized amount for the discharge of a debt or liability denominated in foreign exchange. Non-Resident Indian Non-resident Indian means a person resident outside India who is a citizen of India or a person of Indian origin. Person of Indian origin Person of Indian Origin means an individual, not being a citizen of Pakistan or Bangladesh: i) who at any time held an Indian passport; or 7 ii) who or either of whose parents or grandparents were the citizen of India; or iii) who is a spouse of an Indian citizen or a spouse of a person referred to in the above clauses. REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE EGULATION AND Chapter II of the Act containing Sections 3-9 deals with Regulation and Management of Foreign Exchange. Section 3 prohibits any person other than an authorised person from dealing in or transferring any foreign exchange or foreign security to any person or making any payment to or for the credit of any person resident outside India in any manner or receiving otherwise through an authorised person any payment by order or on behalf of any person resident outside India in any manner except as provided in the Act, rules or regulations made thereunder or with the general or special permission of the Reserve Bank of India. Section 3(d) prohibits a person to 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, except as otherwise provided in the Act and rules or regulations made thereunder. For this purpose, financial transaction has been defined to mean making any payment to or for the credit of any person or receiving any payment for, by order or on behalf of any person. Financial transaction also includes drawing, issuing or negotiating any bill of exchange or promissory note or transferring any security or acknowledging any debt. REALISATION, REPATRIATION AND SURRENDER OF FOREIGN CURRENCY, Section 8 of the Act requires the person resident in India to make all reasonable efforts to realise and repatriate the foreign exchange due or accrued as per the directions of the Reserve Bank. In exercise of the powers conferred by Section 8, sub-section (6) of Section 10, clause (c) of sub-section (2) of Section 47 of the Foreign Exchange Management Act, 1999, the Reserve Bank issued Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015 relating to the manner of, and the period for, realisation of foreign exchange, repatriation of realised foreign exchange to India and its surrender. 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 - (a) that the receipt by him of the whole or part of that foreign exchange is delayed; or 8  (b) that the foreign exchange ceases in whole or in part to be receivable by him. It may be noted that 'Foreign exchange due' means the amount which a person has a right to receive or claim in foreign exchange. MANNER OF REPATRIATION On realisation of foreign exchange due, a person shall repatriate the same to India, namely bring into, or receive in, India and - (a) sell it to an authorised person in India in exchange for rupees; or (b) retain or hold it in account with an authorised dealer in India to the extent specified by the Reserve Bank; or (c) 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. A person shall be deemed to have repatriated the realised foreign exchange to India when he receives in India payment in rupees from the account of a bank or an exchange house situated in any country outside India, maintained with an authorised dealer. PERIOD FOR SURRENDER OF REALISED FOREIGN EXCHANGE A person not being an individual resident in India shall sell the realised foreign exchange to an authorised person, within the period specified below :- (i) foreign exchange due or accrued as remuneration for services rendered, whether in or outside India, or in settlement of any lawful obligation, or an income on assets held outside India, or as inheritance, settlement or gift, within seven days from the date of its receipt; (ii) in all other cases within a period of ninety days from the date of its receipt. PERIOD FOR SURRENDER IN CERTAIN CASES Any person not being an individual resident in India who has acquired or purchased foreign exchange for any purpose mentioned in the declaration made by him to an authorised person under sub-section (5) of Section10 of the FEMA does not use it for such purpose or for any other purpose for which purchase or acquisition of foreign exchange is permissible under the provisions of the Act or the rules or regulations or direction or order made thereunder, shall surrender such foreign exchange or the unused portion thereof to an authorised person within a period of sixty days from the date of its acquisition or purchase by him. Where the foreign exchange acquired or purchased by any person not being an individual resident in India from an authorised person is for the purpose of foreign travel, then, the unspent balance of such foreign exchange shall, save as otherwise provided in the regulations made under the Act, be surrendered to an authorised person─ 9 (i) within ninety days from the date of return of the traveller to India, when the unspent foreign exchange is in the form of currency notes and coins; and (ii) within one hundred eighty days from the date of return of the traveller to India, when the unspent foreign exchange is in the form of travellers cheques. Period for surrender of received/realised/unspent/unused foreign exchange by Resident Individuals A person being an individual resident in India 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 a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of his return to India, as the case may be. Exemption The Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2015 does not apply to foreign exchange in the form of currency of Nepal or Bhutan. In exercise of the powers conferred by Section 47 of the Foreign Exchange Management Act, the Reserve Bank issued the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 in respect of remittance outside India by a person whether resident in India or not, of assets in India. Remittances by individuals not being NRIs/ PIOs 'Remittance of assets' means remittance outside India of funds in a deposit with a bank/ firm/ company, provident fund balance or superannuation benefits, amount of claim or maturity proceeds of insurance policy, sale proceeds of shares, securities, immovable property or any other asset held in India in accordance with the provisions of the Foreign Exchange Management Act, 1999 (FEMA) or rules/ regulations made there under. ADs may allow remittance of assets by a foreign national where: (i) the person has retired from employment in India; (ii) the person has inherited from a person referred to in section 6(5) of the Act * *Section 6(5) of FEMA states that a person resident outside India may hold, own, transfer or invest in any immovable property situated in India if such 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. (iii) the person is a non-resident widow/widower and has inherited assets from her/his deceased spouse who was an Indian national resident in India. 10  (iv) the remittance should not exceed USD one million per financial year. This limit, however, will not cover sale proceeds of assets held on repatriation basis. In case the remittance is made in more than one instalment, the remittance of all instalments should be made through the same AD on submission of documentary evidence. (v) the remittance is in respect of balances held in a bank account by a foreign student who has completed his/ her studies, provided such balance represents proceeds of remittances received from abroad through normal banking channels or rupee proceeds of foreign exchange brought by such person and sold to an authorised dealer or out of stipend/ scholarship received from the Government or any organisation in India. These facilities are not available for citizens of Nepal or Bhutan or a PIO. REMITTANCES BY NRIS/ PIOS ‘Non-Resident Indian’ (NRI) means a person resident outside India who is a citizen of India. A ‘Person of Indian Origin (PIO)’ is a person resident outside India who is a citizen of any country other than Bangladesh or Pakistan or such other country as may be specified by the Central Government, satisfying the following conditions: Who was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or (i) Who belonged to a territory that became part of India after the 15th day of August, 1947; or (ii) Who is a child or a grandchild or a great grandchild of a citizen of India or of a person referred to in clause (a) or (b); or (iii) Who is a spouse of foreign origin of a citizen of India or spouse of foreign origin of a person referred to in clause (a) or (b) or (c). ADs may allow NRIs/ PIOs, on submission of documentary evidence, to remit up to USD one million, per financial year: (i) out of balances in their non-resident (ordinary) (NRO) accounts/ sale proceeds of assets/ assets acquired in India by way of inheritance/ legacy; (ii) in respect of assets acquired under a deed of settlement made by either of his/ her parents or a relative as defined in Companies Act, 2013. The settlement should take effect on the death of the settler; (iii) in case settlement is done without retaining any life interest in the property i.e. during the lifetime of the owner/ parent, it would tantamount to regular transfer by way of gift and the remittance of sale proceeds of such property would be guided by the extant instructions on remittance of balance in the NRO account; 11 In case the remittance is made in more than one instalment, the remittance of all instalments should be made through the same AD. Where the remittance is to be made from the balances held in the NRO account, the Authorised Dealer should obtain an undertaking from the account holder stating that the said remittance is sought to be made out of the remitter’s balances held in the account arising from his/ her legitimate receivables in India and not by borrowing from any other person or a transfer from any other NRO account and if such is found to be the case, the account holder will render himself/ herself liable for penal action under FEMA. REMITTANCES BY COMPANIES/ ENTITIES ADs may allow remittances by Indian companies under liquidation on directions issued by a Court in India/orders issued by official liquidator in case of voluntary winding up on submission of: (i) Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for. (ii) Auditor's certificate to the effect that the winding up is in accordance with the provisions of the Companies Act, 1956. (iii) In case of winding up otherwise than by a court, an auditor's certificate to the effect that there are no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance. ADs may also allow Indian entities to remit their contribution towards the provident fund/ superannuation/ pension fund in respect of their expatriate staff resident but “not permanently resident” in India. Remittances/ winding up proceeds of branch/ office ADs may permit remittance of assets on closure or remittance of winding up proceeds of branch office/ liaison office (other than project office) on submission of the following documents: (i) A copy of the Reserve Bank's permission for establishing the branch/ office in India. (ii) Auditor’s certificate: a. indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; b. confirming that all liabilities in India including arrears of gratuity and other benefits to the employees etc., of the branch/ office have been either fully met or adequately provided for; c. confirming that no income accruing from sources outside India (including proceeds of exports) d. as remained un-repatriated to India; 12  e. confirming that the branch/office has complied with all regulatory requirements stipulated by the Reserve Bank of India from time to time regarding functioning of such offices in India; (iii) a confirmation from the applicant that no legal proceedings are pending in any Court in India and there is no legal impediment to the remittance; and (iv) a report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the office in India. Remittance of assets requiring RBI approval Prior approval of the Reserve Bank is necessary for remittance of assets where: (a) Remittance is in excess of USD 1,000,000 (US Dollar One million only) per financial year (i) on account of legacy, bequest or inheritance to a citizen of foreign state, resident outside India; (ii) by NRIs/ PIOs out of the balances held in NRO accounts/ sale proceeds of assets/ the assets acquired by way of inheritance/ legacy. (b) Hardship will be caused to a person if remittance from India is not made to such a person. Income-tax clearance The remittances are subject to payment of applicable taxes in India. Reserve Bank of India does not issue any instructions under FEMA clarifying tax issues. It is mandatory on the part of Authorised Dealers to comply with the requirement of tax laws, as applicable. Exemption from Realisation or Repatriation Section 9 of the Act contains exemptions from the application of provisions relating to holding of foreign currency and realisation and repatriation in certain circumstances, as provided under Sections 4 and 8 of the Act respectively. Accordingly, possession of foreign currency or coins by any person or class of persons, as the Reserve Bank may specify is not prohibited. A person or class of persons may hold and operate foreign currency account within the prescribed limits as may be specified by the Reserve Bank. Foreign exchange acquired or received before 8th July, 1947, or any income arising or accruing thereon which is held outside India, in pursuance of a general or special permission of RBI, is also exempted. Provisions relating to holding of foreign exchange, realisation and repatriation of foreign exchange are not applicable to person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from certain persons mentioned above and any income arising there from. Reserve Bank may also specify the exemption limit up to which the foreign exchange earned by a person from employment, business, trade, vocation services, honorarium, gifts, inheritance or other legitimate means may be possessed. Reserve Bank may also exempt such other receipts as it thinks fit. 13 POSSESSION AND RETENTION OF FOREIGN CURRENCY OR COINS Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015 deals with limits on possession and retention of foreign currency or foreign coins. Under Regulation 3 the Reserve Bank has specified following limits for possession or retention of foreign currency or foreign coins, namely: (i) possession without limit of foreign currency and coins by an authorised person within the scope of his authority; (ii) possession without limit of foreign coins by any person; (iii) retention by a person resident in India of foreign currency notes, bank notes and foreign currency travellers cheques not exceeding US $ 2000 or its equivalent in aggregate, provided that such foreign exchange in the form of currency notes, bank notes and travellers cheques acquired during a visit to any place outside India by way of payment for services not arising from any business in or anything done in India; or from any person not resident in India and also who is on a visit to India, or as honorarium or gift or for services rendered or in settlement of any lawful obligation; or as a honorarium or gift while on a visit to any place outside India; or represents unspent amount of foreign exchange acquired from an authorised person for travel abroad. Regulation 4 deals with possession of foreign exchange by a person resident in India but not permanently resident therein and provides that a person resident in India but not permanently resident therein may possess without limit foreign currency in the form of currency notes, bank notes and travellers cheques, if such foreign currency was acquired, held or owned by him when he was resident outside India and, has been brought into India in accordance with the law for the time being in force. Explanation to regulation 4 defines the term ‘not permanently resident as to mean a person resident in India for employment of a specified duration (irrespective of length thereof) or for a specific job or assignment, the duration of which does not exceed three years. 14  CURRENT ACCOUNT TRANSACTIONS Definition | Section 2(j) Current account transaction means a transaction other than a capital account transaction. Without prejudice to the generality of the foregoing provisions current account transactions shall also include the following. 1) Payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business; 2) Payments due as interest on loans and as net income from investments; 3) Remittances for living expenses of parents, spouse and children residing abroad; and 4) Expenses in connection with foreign travel, education and medical care of parents, spouse and children Distinction between current expenditure and capital expenditure under Income Tax Act Distinction between current expenditure and capital expenditure has been recognized under Income Tax Act also. In Assam Bengal Cement Co. v. CIT (1995) 27 ITR 34 (Supreme Court), it was held that if expenditure was made for acquiring or bringing in to existence an asset or advantage for the enduring benefit of the business, it was properly attributable to capital and was of the nature of capital expenditure. If, on the other hand, it was made for running of business or working it with a view to produce profits, it was revenue expenditure. In Empire Jute Co. v. CIT (1980) 124 ITR I (SC), it was observed that there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may none the less, be on revenue account and test of enduring benefit may break down. What is material is the nature of advantage in commercial sense. Test of enduring benefit is not certain and conclusive test and cannot be applied blindly and mechanically……Broadly, the same principle should apply in FEMA also. Dealings in current account transactions. Section 5 Under FEMA, there are restrictions only on Capital Account Transactions. Current Account Transactions are free unless there is specific restrictions. Any person may sell or draw any foreign exchange to or from an authorized person if such sale or drawl is a current account transaction. However, the Central Govt. may impose reasonable restrictions on current account transactions in the public interest in consultation with the RBI by making the appropriate rules. Accordingly, the Central Govt. has made Foreign Exchange Management (Current Account Transactions) Rules. 2000. 15 Thus, generally all current account transactions are free subject to reasonable restrictions, which may be imposed by Central Govt. in consultation with RBI. Foreign Exchange Management (Current Account Transactions) Rules, 2000 I) Prohibited Current Account Transactions: There is prohibition of certain remittances, even if they are current account transactions. Such transactions are: 1) Transactions with Nepal/Bhutan i. Drawl of foreign exchange for travel to Nepal or Bhutan is not permitted; ii'. Transaction with a person resident in Nepal or Bhutan cannot be made in foreign exchange, unless permitted by RBI by a special or general order. 2) Commission on exports to Joint Venture/Wholly Owned Subsidiary abroad Commission on exports made towards equity investments in Joint Venture/Wholly Owned Subsidiary abroad of Indian companies is not permitted. 3) Call Back Charges Payment related to call back services of telephone. In call back system, the party which is receiving the telephone call makes payment of telephone charges. 4) Lottery/Races i. Remittance out of lottery winnings; ii. Remittance of income from racing/riding etc. iii. Remittance for purchase of lottery tickets, banned magazines etc. 5) Lottery tickets/Money circulation schemes Some organizations advise individuals they have won prizes in lotteries, etc., and they should arrange to remit some amount in US dollars as fees. It has been clarified that remittance for lottery like schemes functioning under different names such as money circulation scheme, remittance for purpose of securing prize money, awards is prohibited. 6) Rupee State Credit Route Payment of commission on exports under Rupee State Credit Route, except commission up to 10 of invoice value of exports of tea and tobacco. II) Central Government Approval: In the following cases, prior approval of concerned Ministry of Government of India will be required for remittance, even if they are current account transactions. However, if the payment is made out of Resident Foreign Currency Account, approval of government is not required. The relaxation is also applicable if payment is made out of funds in EEFC A/c, in some cases. 16 1) Cultural tours For cultural tours, permission of Ministry of HRD (Department of Education and Culture) is required. 2) Advertisements by Public Sector Undertakings/Governments Advertisements abroad by any public sector undertaking, State Government and Central Government department for any purpose other than for promotion of tourism, foreign investment and for international bidding (exceeding US $ 10000) will require approval from Ministry of Finance; (Department of Economic Affairs). 3) Chartered vessel by public sector undertaking/Government Payment for freight of vessels chartered by public sector undertakings or import by a government department or a public sector undertaking on CIF basis can be made with the approval of Ministry of Shipping. 4) Payment of import on CIF basis by public sector undertaking /Government through ocean transport Payment of import through ocean transport by government or a public sector undertaking on CIF basis requires approval of Ministry of Transport. 5) Agents of Multi Modal Transporters Multi-modal transport operators making payments to their agents abroad have to obtain registration certificate from Ministry of Transport. 6) Hire charges of Transponders Remittance of hiring charges of transponders by TV channels should be approved by Ministry of Information and Broadcasting and remittance of hiring charges of transponders by Internet Service Providers is required to be approved by Ministry of Communication and Information Technology. 7) Container detention charges beyond prescribed limits Remittance of container detention charges exceeding rates prescribed by Director General of Shipping requires approval from Ministry of Shipping. 8) Prize money for sports Remittance of prize money/sponsorship of sports activity abroad will require approval from Ministry of HRD (Department of Youth Affairs and Sports), if the remittance amount exceeds US $ 1 lakh. It may be noted that aforesaid permission is not required irrespective of amount, if remittance is made by International/National/State level Sports Bodies. 9) Remittance for membership of P&I Club* – Ministry of Finance (Insurance Division) 17 *A Protection and Indemnity or P&I club is a non-governmental, non-profitable mutual or cooperative association of marine insurance providers to its members which consists of ship owners, operators, charterers and seafarers under the member companies. (II) RBI Approval: In respect of certain current account transactions, restriction in the form of RBI approval has been imposed. The purpose of such restriction is to ensure that capital is not remitted in the garb of current account payment. Thus, remittance above the prescribed limits will be permitted if the RBI is satisfied that these are indeed current account transactions. It may be noted that if remittance is out of the Resident Foreign Currency Account, no permission of RBI is required even for remittance above the prescribed limits. The said relaxation is also available if the payment is made out of the funds held in EEFC A/c, but only in a few cases. Following are important transactions for which the RBI approval is required: 1) Release of foreign exchange exceeding US $ 10000 or its equivalent in a calendar year for one or more private visits abroad (other than Nepal and Bhutan); 2) Release of foreign exchange exceeding US $ 25000 or its equivalent in a calendar year for business travel, attending conference and specialized training; 3) Release of foreign exchange exceeding US $ 1 lakh or its equivalent for persons going abroad for employment; 4) Gift remittance to family members and relatives exceeding US $5000 or its equivalent per remitter/donor per annum; 5) Donations exceeding US $5000 or its equivalent per remitter/donor per annum; 6) Release of foreign exchange for meeting expenses for medical treatment abroad up to US $ 1 lakh or its equivalent without insisting on any estimate from the hospital/doctor; 7) Release of exchange for studies abroad exceeding the estimates from the institution abroad or US$ 1 lakh per academic year, whichever is higher; 8) Commission per transaction to agents abroad for sale of residential flats/commercial plots in India exceeding the limit of US$ 25,000 or 5 of the inward remittance per transaction, whichever is higher; 9) Remittance exceeding US$ 1 million per project for any consultancy services procured from abroad; 10) Remittance exceeding US$ 1 lakh by an entity in India by way of re-imbursement of pre- incorporation expenses. 18 Release of Foreign Exchange by Authorised Dealer Category II The Reserve Bank of India has granted license to certain entities by authorizing them as authorised Dealer – Category II to undertake a range of non-trade current account transactions. They can release/remit foreign exchange for the following non-trade current account transactions: a) Private visits b) Remittances by tour operators/travel agents to overseas agents/principals/hotels c) Business travel d) Fee for participation in global conferences and specialized training e) Remittance for participation in international events/competitions (towards training, sponsorship and prize money) f) Film shooting g) Medical treatment abroad h) Disbursement of crew wages i) Overseas education j) Remittance under educational tie up arrangements with universities abroad k) Remittance towards fee for examinations held in India and abroad and additional score sheets for GRE, TOFEL, etc. l) Employment and processing, assessment fee for overseas job applications m) Emigration and emigration consultancy fees n) Skills/ credential assessment fee for intending migrants o) Visa fees p) Processing fee for registration of document as required by other governments q) Registration/subscription/membership fee to International Organisations. Release of Foreign Exchange for Haj/Umrah Pilgrimage Authorised dealers and full-fledged money Changer may release the full amount of BTQ* entitlement in cash or up to the cash limit specified by the Haj Committee of India, to the Haj/Umrah pilgrims. *Basic Travel Quota (BTQ) Resident Indian citizens are eligible under the scheme of Basic Travel Quota to avail of foreign exchange up to U.S.$ 3,000 or its equivalent for undertaking one or more private visits to any country abroad (except Nepal and Bhutan) in any calendar year. Foreign nationals permanently resident in India are also eligible to avail of this quota provided they are not availing of facilities for remittance of their salary, savings etc. abroad. 19 20