A Detailed Review of Foreign Exchange Management Act 1999

Ashish M. Shaji

12 Jul, 2023

The Foreign Exchange Management Act was enacted by the Indian parliament, and it came into force in 2000. FEMA was introduced considering the new, liberal and evolving environment. It replaced an earlier Act FERA. The head office of FEMA is located at the capital city (Delhi). In this article, we shall have a detailed review of the Foreign Exchange Management Act 1999.

Objective of Foreign Exchange Management Act 1999

The main objective of this Act is:

• To reinforce and also amend the law relating to the foreign exchange;
• To simplify the external trade and payments;
• To promote systematized growth and maintenance of a healthy foreign exchange market;
• To remove payments disparity;
• To control & direct the employment business and investment of the non-residents;
• To use the foreign exchange resources effectively for the country.

Applicability of the Foreign Exchange Management Act 1999

The Act is applicable to the whole of India and applies to the agencies and offices situated outside India. Further FEMA is applicable to:

• Foreign Exchange;
• Foreign Security;
• Export of a commodity and or service from India to outside;
• Import of any commodity and or service from outside of India;
• Securities defined under Public Debt Act 1944¹;
• Purchase, sale and exchange of any kind;
• Banking and financial services and insurance services;
• Any Indian citizen residing in the country or outside.

Current Account Transactions and Capital Account Transactions

As per the FEMA, accounts are classified into:

• Capital Account Transaction;
• Current Account Transaction.

Capital Account Transaction is explained under Section 2(e) of the Act. It means those transactions which alter or changes asset or liabilities, including contingent liabilities outside India of persons residing in India or assets or liabilities in India of persons residing outside India & includes transactions referred to in Section 6(3).

Current Account Transaction is defined under Section 2(j) of the Act. It defines current account transaction as a transaction other than capital account transaction and includes:

• Payments due relating to the foreign trade, other current business, services and short term banking as well as credit facilities in the normal course of business;
• Payments due as interest on loans & as net income from investments;
• Remittances for living expenses of parents, children and spouse resident abroad and;
• Expenses related to foreign travel, education and medical care of parents, children and spouse.

Any expenditure not covered under the capital account transaction, will be covered in current account transaction even though it is not seen among above points.

Restrictions on dealing in Foreign Exchange

Section 3 of the Act deals in restrictions on dealing with foreign exchange:

• No person apart from the authorized person can deal in or transfer any foreign exchange or foreign security;
• No person shall make payment to or for the credit of any person resident outside India;
• No person shall receive, apart from an authorized person, a payment by order or on behalf of a person residing outside India.

Additionally, Section 4 of the Act provides that no one resident in India shall acquire, hold, own, possess, or transfer foreign exchange or foreign security or any immoveable property located outside India.

Prohibition on Withdrawal of Foreign Exchange

Withdrawal of foreign exchanges for the following purposes is banned:

• Remittance out of winning the lottery;
• Remittance from the income on racing/riding etc.;
• Remittance for purchasing lottery ticket, football pools, sweepstakes etc.;
• Payment of commission on exports towards equity investment of Indian companies in JV/Wholly owned subsidiaries abroad;
• Payment of commission on export under Rupees State Credit Routes except commission up to 10% of invoice value of export of tea and tobacco;
• Payment pertaining to call back services of telephones;
• Travel to Nepal and/or Bhutan;
• Remittance of the interest income on funds held in the NRSR Account;
• Transaction with a resident in Nepal or Bhutan.

Export of Goods and Services under Foreign Exchange Management Act 1999

Section 7 of the Act states that every exporter of goods:

• Shall provide to the RBI/any other authority with a declaration/statement in a manner prescribed and should contain true and correct material particulars, which must also include the amount representing the full export value. Further, if the amount cannot be ascertained, then the prevailing market value would be mentioned;
• Should provide such other information to the RBI to ensure the realization of the export proceeds by such exporter;
• The RBI may determine the full value of export goods or reduced value of goods to make sure that they adhere to the prevailing market conditions and to check that it is received without any delay;
• As far as payment of services is concerned, every exporter of services is required to provide to the RBI or to any other authority, a declaration in a form. It should contain true and correct material information.

Foreign Exchange Management Act 1999: Other Inclusions

The act also lays down scope of adjudication and appeal. Section 16 deals with the appointment of the adjudicating authority, Section 17 deals with the appeal to special director, Section 18 talks about the establishment of the appellate tribunal. Further, Section 28 states the procedure and powers of the appellate tribunal special director (Appeals).

The Act provides for penalties in case of contravention of its provisions or any rule, direction, regulation, order or notification issued under FEMA. Such person will be liable to pay penalty up to thrice the sum involved in such contravention or up to 2 lakh rupees. In case where the contravention is a continuing one, then such person will be liable for a further penalty.

Conclusion

The Foreign Exchange Management Act 1999 is more liberal in nature as compared to the old act and also more flexible. Anyone who wishes to do business in a foreign country or wishes to purchase foreign securities needs an authorized person to do it and also needs to understand the Act to avoid penalties.

Read our article:Compounding of Contraventions under FEMA, 1999

1. https://www.indiacode.nic.in/handle/123456789/2405?view_type=search&sam_handle=123456789/1362