FEMA

Disclaimer: Copyright infringement not intended.

Context

• The Enforcement Directorate has initiated an inquiry into the British Broadcasting Corporation (BBC) India under the Foreign Exchange Management Act (FEMA) for suspected violations.

FEMA: Background

• The Foreign Exchange Management Act (FEMA) was introduced in 1999 to replace the outdated Foreign Exchange Regulation Act (FERA) of 1973. FEMA act was a modernization of the Indian economy and created to liberalize and privatize the Indian market.
• The Central Government of India formulated an act to encourage external payments and across-the-border trades in India known as the Foreign Exchange Management Act.
• FEMA was formulated to fill all the loopholes and drawbacks of FERA (Foreign Exchange Regulation Act) and hence several economic reforms (major reforms) were introduced under the FEMA Act.
• FEMA was basically introduced to de-regularize and have a liberal economy in India.
• FEMA as a regulatory mechanism 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 not only applicable to residents of India within India, but also applicable to all branches, offices and set-ups outside India which are owned or controlled by a person resident in India.
• FEMA introduced a significant change in the system by making all crimes related to currency exchange civil crimes, rather than criminal offences (previously applicable in the case of FERA).
• FEMA is a civil law against FERA, which was a harsh police law. All violations under FERA will lead to criminal charges. The violations were criminal in nature and could not be repeated. In comparison to FERA, only major violations are considered major offenses in FEMA.

FEMA and FERA

FERA	FEMA
It was enacted in 1973 to promote the regulation of foreign exchange and trade in India.	It was enacted in 1999 to encourage and facilitate external trade.
It was restrictive	It is flexible and makes foreign trade and transactions comparatively easy.
It contains 81 sections	It contains 49 sections
It was a gravely strict act as it criminalized every offence and required imprisonment for even minor offences.	It promoted liberalization and converted the criminal offence under FERA into ‘civil offence’.
It was introduced at a time when the foreign exchange reserves (Forex) of India were low.	It was introduced with the intention of replacing FERA, as it was unsuccessful in applying the restrictions.

Objectives of FEMA

• The main objective for which FEMA was introduced in India was to facilitate external trade and payments.
• In addition to this, FEMA was also formulated to assist orderly development and maintenance of the Indian forex market.

Salient Features of FEMA

• It gives the authority and power to Central Government to impose the restrictions on all such activities that include payments to or from any person residing outside India.
• All the transactions relating to foreign exchange and trade cannot be carried out without prior permission from FEMA.
• The foreign transactions/trade can be carried out only through an individual who is registered/authorized under FEMA.
• Deals involving foreign exchange under current account can be prohibited by Central Government, even after being carried out by an authorized person, based on general public interest.
• Indian residents will be allowed to carry out trade in foreign exchange, foreign security or to possess an immovable property outside India if it was owned while staying abroad or inherited from a person residing outside India.

FEMA and Foreign Exchange Transactions

• FEMA outlines the formalities and procedures for the dealings of all foreign exchange transactions in India.
• These foreign exchange transactions have been classified into two categories — Capital Account Transactions and Current Account Transactions.
• Under the FEMA Act, the balance of payment is the record of dealings between the citizen of different countries in goods, services and assets. It is mainly divided into two categories, i.e. Capital Account and Current Account.
  • Capital Account comprises all capital transactions whereas Current Account comprises trade of merchandise.
  • Current Account transactions are those transactions that involve inflow and outflow of money to and from the country/countries during a year, due to the trading/rendering of commodity, service, and income.
• The current account is an indicator of an economy’s status.

Applicability of FEMA Act

• FEMA (Foreign Exchange Management Act) is applicable to the whole of India and equally applicable to the agencies and offices located outside India (which are owned or managed by an Indian Citizen).
• The head office of FEMA is situated in New Delhi and known as Enforcement Directorate.
• FEMA is applicable to:
  • Indian foreign exchange
  • Indian foreign security
  • Banking, financial, and insurance services
  • Exporting of any product and/or services from India to a foreign country
  • Importing of any product and/or services from outside India
  • Securities as defined under the Public Debt Act of 1994
  • Buying, Selling,
  • Any Indian Entity owned by a person resident outside India
  • Any citizen of India, residing in India or in a foreign country
  • and Exchanging of any kind of product/service
  • Any overseas company owned by a non-resident Indian (NRI)

The Current Account transactions under the FEMA Act has been categorized into three parts which, namely-

• • Transactions prohibited by FEMA,
  • The transaction requires Central Government’s permission,
  • The transaction requires RBI’s permission.

What Prohibitions Are Made Under FEMA Act In India?

• Sending money which is the result of winning the lottery.
• Sending money which is the result of winning horse racing, cricket games, etc.
• Sending money to buy a lottery ticket, football betting, sweepstakes, banned publications, etc.
• The payment of commission on exports towards equity investment of Indian companies in joint ventures or wholly-owned subsidiaries abroad.
• The sending of a dividend by any company. This is only applicable if dividend balancing is applicable.
• The payment of commission on exports under Rupees State Credit Routes (except commission up to 10 percent of the invoice value of export of tea and tobacco).
• Any payment regarding “Call-back Services” of telephones.
• Any travel to Bhutan and/or Nepal.
• Sending interest income on funds held in Non-resident Special Rupees (NRSR) scheme account.
• A transaction of any kind with a resident of Bhutan or Nepal.

What Are the Rules Of Trade For Foreign Exchange Management Act (FEMA) In India?

According to the RBI, foreign exchange can be undertaken with any authorized dealer via the Prior Approval Route or General Permission Route.

Scenario	Limitations
Visiting privately to any country (except Bhutan and Nepal)	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Personal donations/gifts by resident individuals	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Corporate Donations by persons other than resident individual	One per cent of the forex earnings during the preceding three financial years. OR US$ 5,000,000, whichever is less, for a specified purpose.
Leaving India for the purposes of gainful employment	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Payment for emigration	Liberalized Remittance Scheme (LRS) limit of USD 2,50,000/- per year.
Payment for the care of relatives (only close relatives) outside of India by a person who is resident but not permanently resident in India	The salary (after deducting income tax, Provident Fund, and other deductions) of a person not being a permanent resident in India and a citizen of a foreign state other than Pakistan. OR US$2,50,000/- a year per recipient in all other cases.
Business travel abroad	US$250,000 per year.
Attending a training course or conference	US$250,000 per year.
For overseas medical treatment	US$250,000 per year.
The care of a patient going for a medical check-up or medical treatment abroad.	US$250,000 per year.
The care of a patient going for a medical check-up or medical treatment abroad.	US$250,000 per year.
Studying abroad	US$250,000 per academic year or the education institution’s estimation, whichever is higher
Meeting the expenses of a person accompanying a patient going for a medical check-up or for medical treatment abroad	US$250,000 per year.
Commission payment to an agent outside India for selling of commercial or residential land or property in India	US$25,000 or five percent of the transaction, whichever is higher.
Consultancy services from overseas	US$10,000,000 per project (for infrastructure projects). For all other projects, US$1,000,000 per project
Pre-incorporation expense reimbursements	US$100,000 or five percent of the investment brought into India, whichever is higher.

The following foreign transactions require the approval of the Central Government:

• Cultural tours.
• Advertising in foreign print media for any purpose other than promoting tourism, investments exceeding US$10,000 by a State Government or its Public Sector Undertaking.
• Payment of importation by a Public Sector Undertaking on cost, insurance, and freight on ocean transport.
• Payment for chartered freight vessels.
• Payment of shipping container detention charges above the Director-General of Shipping’s (DGS’s) rate.
• Payment of prize money or sponsorship money for any activity. Payment of any sport participated outside of India (other than national/international level sports) if it exceeds US$1,00,000.
• The payment for hiring transponders for internet service providers or television channels.
• Payment of Protection and Indemnity (P&I) Club membership.
• Payment for multi-model transport operators and their agencies abroad.

Penalties Under FEMA

• If any person contravenes the provisions of FEMA or any rule, direction, regulation, order or notification issued under FEMA, he shall be liable to pay a penalty up to thrice the sum involved in such contravention or up to Rs.2 lakh.
• Where such contravention is a continuing one, he shall be liable to pay a further penalty which may extend to Rs.5,000 for every day during which the contravention continues.

Power to Compound Contravention

• Any contravention be compounded within one hundred and eighty days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank as may be authorised in this behalf by the Central Government in such manner as may be prescribed.
• Where a contravention has been compounded, no proceeding or further proceeding, as the case may be, shall be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention so compounded.

Authority and Courts

In exercise of the powers conferred by section 18 of the Foreign Exchange Management Act (FEMA), 1999, the Central Government constituted Appellate Tribunal for Foreign Exchange (ATFE) to hear appeals against the orders passed by the Adjudicating Authorities and the Special Director (Appeals) under this Act.

• Adjudicating Authority: Adjudicating Authority holds an enquiry for the purpose of imposing any penalty upon a complaint in writing made by any officer authorised by an order passed by Central Government.
• Appeal to Special Director (Appeals) : Any person aggrieved by an order made by the Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy Director of Enforcement, may prefer an appeal to the Special Director (Appeals) within 45 days of the communication of the Order.
• Appellate Tribunal under FEMA : Any person aggrieved by an Order made by the Adjudicating Authority, or by Special Director (appeals) may prefer an appeal to Appellate Tribunal within 45 days from the date on which a copy of the Order is received by the aggrieved person or by the Central Government.
• Appeal to High Court: Any person aggrieved by any decision or Order of the Appellate Tribunal may file an Appeal to the High Court within 60 days of the date of communication of a decision or the Order of the Appellate Tribunal to him on any question of law arising out of such Order.

PRACTICE QUESTION Q. Which of the following statements are correct in reference to Foreign Exchange Management Act? a)    All the Capital and Current account transactions relating to foreign exchange and trade cannot be carried out without prior permission from FEMA. b)    FEMA promoted liberalization and converted the criminal offence under FERA (Foreign Exchange Regulation Act) into ‘civil offence’. c)    FEMA (Foreign Exchange Management Act) is applicable to the whole of India but not equally applicable to the agencies and offices located outside India. d)    If any person contravenes the provisions of FEMA or any rule, direction, regulation, order or notification issued under FEMA, he shall be liable to pay a penalty up to thrice the sum involved in such contravention. 1.    a and c 2.    a, b and d 3.    b, c and d. 4.    None of the above. Correct Answer: Option 2

https://www.thehindu.com/news/national/ed-initiates-probe-into-bbc-indias-alleged-foreign-exchange-violation/article66732165.ece