FEMA: Foreign Exchange Management Act, 1999

The FEMA (Foreign Exchange Management Act) was introduced in 1999 in India's modern law to regulate foreign exchange. It replaced the earlier Foreign Exchange Regulation Act (FERA), which imposed strict penalties and criminalized violations. FEMA streamlines regulations for cross-border transactions, foreign investments, and remittances, thereby enhancing the global integration, transparency, and investment attractiveness of India's economy.

This article will provide you with insights into FEMA's objectives, scope, applicability, permitted transactions, restrictions, and penalties, enabling you to understand how this legislation influences India's foreign exchange landscape today.

What are the Objectives of FEMA?

• Enhances Economy: The FEMA Act permits foreign investments in India and also boosts Indian businesses to work globally while maintaining legality and transparency in everything.

• Control Over the Money Flow: It keeps track of all the foreign exchange that comes into as well as leaves the country. This helps the government in maintaining the stability of the value of the Indian rupee.

• Global Connections: The FEMA Act ensures that India adheres to all the rules regarding international foreign exchange and trade, helping in building trust and connection with other countries and global organisations.

• Appropriate Usage: The Act ensures that the foreign currency is used appropriately and is not misused. It helps the country to have sufficient reserves to use in case of an emergency or global trade.

• Easy Trade: It helps individuals and Indian businesses to send and receive money easily from other countries for any purpose, including travel, education, investment, or business.

Where is the FEMA Act Applicable?

The head office of FEMA is located in New Delhi, known as the Enforcement Directorate. The FEMA (Foreign Exchange Management Act) applies to the whole of India as well as agencies and offices that are situated outside India (which are either managed or owned by a citizen of India). It is also applicable to the following:

• Foreign security
• Foreign exchange
• Purchase, sale, and exchange of any kind.
• Services related to banking, finance, and insurance
• Securities, as mentioned under the Public Debt Act 1994.
• Any Indian citizen, staying inside or outside the country (NRI).
• Importing any commodity and/or service from abroad.
• Exporting any commodity and/or service from India to a foreign country.
• Any foreign company owned by an NRI (Non-resident Indian) where the owner is 60% or more.

As of now, under the FEMA Act, the current account transactions have been classified into three different parts, which are:

• Transactions prohibited by FEMA,
• The transactions require the permission of the RBI,
• The transactions need the Central Government's permission.

What are the Categories of Authorized Dealers Under the FEMA Act?

What are the Prohibitions on Drawal of Foreign Exchange?

• Travel expense for a trip to Bhutan and/or Nepal.

• A transaction involving a resident of Bhutan and Nepal.

• Any kind of transfer of income from winning a lottery.

• Any remittance from the earnings associated with racing/riding, etc.

• Payment related to telephone "Call back services".

• Payments for purchasing a lottery ticket, sweepstakes, football pools, banned/prescribed magazines, etc.

• Remittance of interest income of funds held in a Non-resident Special Rupees Scheme account (NSRS).

• Payment of commission on exports under Rupee state credit routes, except for tea and tobacco exports, where commissions may reach a maximum of 10% of the invoice value.

• Dividend remittance by companies. However, this clause applies only if the dividend balance requirement is applicable.

• Commission payments for exports linked to equity investment in India joint ventures or wholly owned subsidiaries outside India. 

What are the Routes for the Drawal of Foreign Exchange?

According to the Reserve Bank of India, foreign exchange can be accessed from any authorized dealer through the prior approval route or the general permission route.

Foreign Exchange Transactions Requiring Central Government Approval

There are a few foreign exchange transactions that require prior approval of the central government, which are stated below:

• Cultural tours.
• Payments to TV channels.
• Payment for hiring transponders.
• Remittance involving internet service providers.
• Remittance of freight for vessels chartered.
• Transactions for the P&I club ministry's membership.
• Remittance by multi-model transport operators to their agents outside India.
• Payment of detention charges for containers exceeding the specified rates by the DG's (Director General of Shipping).
• Payment for imports by a public sector unit or government departments on a cost, insurance, and freight basis (c.i.f.), strictly for ocean transport.
• Advertising in foreign print media for purposes other than tourism promotion, international bidding, and foreign investments exceeding a specified limit of 10000 US dollars by a state government and its public sector units.
• Remittance of prize money or sponsorship for sporting events abroad by individuals not representing a recognized sports organization, provided that the sponsorship/prize money exceeds 1,00,000 US dollars.

What are the Penalties Under FEMA?

FEMA outlines a clear structure for addressing violations or breaches of its provisions, rules, or regulations, which include monetary penalties, property confiscation, and in serious cases or failure to pay, even imprisonment:

General Monetary Penalties:

• Quantifiable Contravention: If a specific amount involved in the contravention can be determined, penalties may reach up to three times the amount involved.
• Non-Quantifiable Contravention: For amounts that cannot be specified, a fixed penalty of Rs. 2,00,000 can be imposed.
• Continuing Contravention: For ongoing violations, an additional penalty of up to Rs. 5,000 per day may apply for each day the violation persists after the first day.

Penalties for Illegal Acquisition of Foreign Assets

• If a person illegally acquires foreign exchange, foreign securities, or immovable property overseas, exceeding Rs. 1 crore, they may face penalties, including:
  • Penalty of up to three times the amount involved.
  • Confiscation of equivalent property value in India.
  • A prison term of up to five years, along with a fine.

Confiscation of Property Related to Violations

• The adjudicating authority has the jurisdiction to confiscate any currency, security, or property closely associated with the contravention.

Civil Imprisonment for Non-Payment of Penalties

• If the penalty is not settled within 90 days of notification, civil imprisonment may be imposed. The duration is determined by the penalty amount:
  • For penalties over Rs. 1 crore: Up to three years.
  • For all other penalties: Up to six months.
• Civil imprisonment does not eliminate the obligations to pay the original penalty.

Right to Appeal

• Individuals can appeal against the decision made by the adjudicating authority to the special director (appeals) within 45 days of receiving the order.
• Further appeals can be taken to the Appellate Tribunal for foreign exchange and subsequently to the High Court on legal questions.
• Throughout this appeal journey, individuals are allowed to seek support from a Chartered Accountant or a legal practitioner.

Conclusion

It is vital to understand the FEMA Act as it governs all foreign exchange transactions in India, including those related to investments, trade, and remittances. The FEMA Act is vital to facilitate international payments and trade while managing the foreign exchange market in India. Understanding and complying with FEMA is essential for individuals as well as businesses that are engaging in cross-border activities. Seeking assistance from Savetaxs experts can help you understand the FEMA regulations easily.

We at Savetaxs have a team of experts who have been serving individuals for a decade now. The team can offer personalized assistance with specific transactions and can also provide valuable support. They will help you navigate the complexities of FEMA regulations and can provide you with expert advice so that you can avoid penalties and experience smooth operations.