FEMA Registration
Foreign Exchange Management Act (FEMA) was formulated by the Central Government of India to outward payments and border trades. Learn FEMA registration process.
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Get Support AnytimeIntroduction to FEMA
Foreign Exchange Management Act (FEMA) was formulated by the Central Government of India to outward payments and border trades. FEMA was introduced in the year 1999 replacing the previous Foreign Exchange Regulation Act (FERA). FEMA filled those loopholes and drawbacks that FERA failed to develop. Apart from these developments, different economic reforms were introduced under this Act. The purpose of FEMA was deregulation and a wide-ranging economy in India.
Foreign exchange transactions are classified further into two categories: -
Current Account Transactions – These transactions include the inflow and outflow of money to and from the different countries, during a year. The reason for the happening of these transactions is trading or rendering services, income and commodities between the countries. Current Account can be a parameter to view a nation’s economic status. Definition of the current accounts transactions is given under Section 2 (gg) of the FEMA Act which defines current account transactions as transactions that are other than capital account transactions and includes:
- payments relating to foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business,
- payments for interest on loans,
- expenses relating to education, foreign travel and medical care of spouse, parents and children, and remittances for living expenses of parents, spouse and children residing abroad.
Further categorization of these current account transactions is into:
- The transactions that require Central Government’s permission
- Prohibited transactions by FEMA
- The transactions that require approval from RBI
Capital Account Transactions – As mentioned above, the reason for the incorporation of the current account and the capital account is the payment balance. Therefore, the balance of payment reminder is the Capital Account. They contain all the movement of capital within the economy because of capital expenditure and receipts. These capital accounts acknowledge foreign assets within domestic investments and vice-versa. According to FEMA, Capital Account Transactions are transactions that alters the liabilities or assets outside India of the persons residing in India or liabilities in India of the persons residing outside of India.
Objectives of FEMA:
The objective behind introduction of FEMA in India was to provide with the facility for external payment and trades. Moreover, the objective of this act is to assist the maintenance and development of the Forex market of India. FEMA was incorporated with the objective to streamline the formalities and procedures of dealing with the foreign exchange transactions within India.
There is a rationale behind these transactions. The purpose of introduction of FEMA is regulation of foreign currency transactions. If foreign transactions are left without any control, they would lead to huge losses to the economy of India. Therefore, with subject to the national interest, it is utmost important to prohibit few foreign currency transactions which are against national interest and permit only those transactions which are approved prior by the government or Reserve Bank of India and shall be carried out freely. In regards to this purpose, transactions may be divided into two parts with conditions imposed on them.
In general, all capital account transactions are prohibited unless permitted and all current account transactions is permitted unless they are prohibited.
Applicability of FEMA Act
FEMA (The Foreign Exchange Management Act) is applicable to the whole of India and to the organizations based outside India but maintained or owned by an Indian citizen. Therefore, the relevancy of FEMA extends to:
- Import of merchandise or any service from a country located outside of India,
- Export of any service or commodity to any country from India,
- Foreign exchange,
- Foreign securities,
- Securities according to the Public Debt Act 1994,
- Alongside, overseas companies owned by non-resident Indians and 60% ownership is assigned to that person,
- Insurance, financial and banking services,
- Non-resident Indians (citizen of India residing outside India),
- Purchase, sale and exchange of any transfer.
Keeping in view the welfare of the economy and the country, certain transactions are prohibited under the Foreign Exchange Management Act. These transactions are mentioned in Rule 3 of Foreign Exchange Management (Current Account Transactions) Rules, 2000. These transactions are the transactions of:
- Remittance to buy sweepstakes, football pools, banned magazines, lottery tickets. And any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000 also.
- Remittance from income on racing/riding or from winning any lottery.
- Commission payment in regards to exports made for any joint venture of an Indian company or entirely owned subsidiaries sent abroad.
- Payment made for ‘Call back services’.
- Remittance on exportation according to Rupees State Credit Routes, only except the commission on 10% of the invoice value on the exportation of tea and tobacco
- Trip to Bhutan or Nepal.
- Any transaction with a resident of Bhutan or Nepal.
- Moreover, remittance of interest income of funds in an NRSR (Non-resident special rupees scheme account).
In order to draw exchange for certain transactions, prior approval from Central Government is mandatory. Schedule III of Foreign Exchange Management (Current Account Transactions) (FEMA) Rules, 2000 mention these transactions along with the corresponding ministry to seek such approval. Like, to put an advertisement in a foreign country-based print media, for any purpose except the promotion of tourism, foreign investments and international bidding (not less than USD 10,000), made by the State Government or its Public Sector Units, the concerned authority to obtain permission is the Ministry of Finance (Department of Economic Affairs).
Permission of the Ministry of Finance (Insurance division) for the remittance for P&I Club ministry’s membership. Ministry of Human Resources Department (Department of Education and Culture), for a cultural trip to a foreign country. For allowance of freight of vessels hired by a PSU, the concerned authority is a ministry of surface transport (chartering wing).
People can find a place to trade abroad for the following purposes. However, the limit under the Liberalization Remittance Scheme (“LRS”) of USD 2,50,000 per financial year must be maintained.
- Private visits to any country (except Nepal and Bhutan)
- A gift
- Going abroad to look for work
- Moving abroad
- However, the retention of close relatives abroad is also less than this
- In addition, attending a business, or attending a conference or special training or meeting expenses to cover medical expenses. On the other hand, overseas testing, or accompanying as a patient caregiver who goes abroad for treatment/testing also comes under this.
- Consistently, the costs associated with foreign treatment are also
- Studies abroad
- However, any other current account transactions are not covered under the current account definition in FEMA 1999.
For this purpose, the Authorized Dealer bank can make money transactions. That also without the prior RBI approval of all current account transactions. However, transactions must not be restricted to transactions under Schedule I, II, or III of the External Finance Management Act (Current Account Transactions Act) (FEMA), 2000.
Therefore, it is because of the Authorized Dealer Bank that it has satisfied itself with the integrity of the transaction so far.
However, any additional payments that exceed the threshold stated for the following purposes will require prior approval from the Reserve Bank of India.
Penalties under FEMA
If a person violates the terms of FEMA or any rule, instruction, regulation, order, or notification issued under FEMA, he may be fined up to twice the amount involved in the violation or Rs.2 lakh. If the contravention persists, he would be subject to an additional penalty of up to Rs.5,000 for each day the contravention continues.
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