Foreign Exchange Management Act, 1999 - FEMA

The FEMA (Foreign Exchange Management Act) was introduced in 1999 as part of India’s modern legal framework 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, enhancing global integration, transparency, and the investment attractiveness of India’s economy.

This article provides insights into FEMA’s objectives, scope, applicability, permitted transactions, restrictions, and penalties, helping you understand how this legislation influences India’s foreign exchange landscape today.

What are the Objectives of FEMA?

• Enhances Economy: FEMA facilitates foreign investment in India and enables Indian businesses to operate globally while maintaining legal and transparent operations.

• Control Over Money Flow: It monitors all foreign exchange entering and leaving the country, helping the government maintain the stability of the Indian rupee.

• Global Connections: FEMA ensures that India complies with international rules on foreign exchange and trade, building trust and cooperation with other countries and global organisations.

• Appropriate Usage: The Act ensures foreign currency is used correctly and is not misused. It helps maintain sufficient reserves for emergencies or global trade.

• Easy Trade: FEMA facilitates smooth foreign exchange transactions for individuals and businesses, including travel, education, investments, and business-related payments.

Where is the FEMA Act Applicable?

The Enforcement Directorate (ED), headquartered in New Delhi, is responsible for enforcing FEMA. The FEMA Act applies to the whole of India as well as to agencies and offices located outside India that are owned or managed by Indian citizens. It also applies to:

• 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 residing in India or abroad (including NRIs)
• Import of any commodity or service from abroad
• Export of any commodity or service from India to any foreign country
• Any foreign company owned by an NRI where the Indian ownership is 60% or more

Under FEMA, current account transactions are classified into three parts:

• Transactions prohibited by FEMA
• Transactions requiring RBI permission
• Transactions requiring Central Government permission

What are the Categories of Authorized Dealers Under FEMA?

What are the Prohibitions on Drawal of Foreign Exchange?

• Travel expenses for visits to Bhutan or Nepal
• Transactions involving residents of Bhutan or Nepal
• Transfer of income from lottery winnings
• Remittances from income generated through racing/riding activities
• Payments related to telephone “call-back services.”
• Payments for lottery ticket purchases, sweepstakes, banned magazines, etc.
• Remittance of interest income from funds held in a Non-Resident Special Rupee Scheme (NSRS) account
• Payment of commission on exports under rupee state credit routes (except for tea and tobacco exports, where commission up to 10% of invoice value is allowed)
• Dividend remittance by companies, where dividend balancing is applicable
• Commission payments for exports linked to equity investment in Indian joint ventures or wholly owned subsidiaries outside India

What are the Routes for Drawal of Foreign Exchange?

As per the Reserve Bank of India, foreign exchange can be accessed from any authorized dealer either through the general permission route or the prior approval 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
• Payments for hiring transponders
• Remittances involving internet service providers
• Remittance of freight for vessels chartered
• Membership payments to the P&I Club
• Remittance by multimodal transport operators to agents abroad
• Payment of detention charges for containers exceeding DG Shipping limits
• Import payments by public sector units/government departments on a CIF basis
• Advertising in foreign print media for non-tourism purposes beyond USD 10,000 by state governments or PSUs
• Sponsorship or prize money for sports events abroad exceeding USD 100,000 for individuals not representing recognized sports bodies

What are the Penalties Under FEMA?

FEMA provides a structured penalty mechanism for violations, including monetary penalties, confiscation, and, in extreme cases or non-payment, civil imprisonment.

General Monetary Penalties

• Quantifiable Contravention: Penalty up to three times the amount involved
• Non-Quantifiable Contravention: Fixed penalty up to ₹2,00,000
• Continuing Contravention: Additional penalty up to ₹5,000 per day after the first day

Penalties for Illegal Acquisition of Foreign Assets

For unlawful acquisition of foreign exchange, foreign securities, or overseas property exceeding ₹1 crore:

• Penalty up to three times the amount involved
• Confiscation of equivalent property in India
• Imprisonment up to 5 years with a fine

Confiscation of Property

• The adjudicating authority may confiscate any currency, security, or property involved in the contravention.

Civil Imprisonment for Non-Payment

If penalties remain unpaid within 90 days:

• Penalties above ₹1 crore: imprisonment up to 3 years
• Other penalties: imprisonment up to 6 months

Right to Appeal

Individuals may appeal to the Special Director (Appeals) within 45 days. Further appeals may be filed with the Appellate Tribunal and, thereafter, with the High Court on legal grounds. Assistance from a Chartered Accountant or legal professional is permitted.

Conclusion

Understanding FEMA is essential as it governs all foreign exchange transactions in India, including investments, trade, and remittances. FEMA enables smooth international payments and regulates India’s foreign exchange market. Compliance is crucial for individuals and businesses engaged in cross-border transactions.

Savetaxs provides expert guidance on FEMA regulations. Our experienced team offers personalized assistance with complex transactions, helping you avoid penalties and ensuring smooth, compliant operations.