Money Transfer Service Scheme is the procedure in which money is transferred from a foreign country to India. It is a form of inward remittance which is done either by a Non-Resident Indian or a company to a resident family. Remittances which are sent under the system of the Money Transfer Service Scheme are required for resident Indians for maintaining individuals.
Inward remittance as it is known as under the scheme of MTSS is meant for expenditure within India. A resident Indian uses these remittances for maintenance and other forms of expenditure.
Hence a scheme which involves the transfer of money from abroad to a resident in India is understood as money transfer service scheme. This scheme is only used for maintaining residents in India. Apart from this, foreign tourists who visit India temporarily can utilise the benefits under this scheme.
Money Transfer Service scheme has been developed by the Reserve Bank of India (RBI). The Indian government, along with the RBI, brought out this scheme to favour foreign tourists who visit India temporarily.
Before introducing the Foreign Exchange Management Act, 1999 (FEMA), the Foreign Exchange Regulation Act, 1973 (FERA) regulated all forms of transactions related to foreign exchange law in India. Due to restrictive practices and less amount of foreign remittance in the country, the government repealed FERA and brought out FEMA in the year 1999.
Under FEMA, the RBI issues rules to authorised dealers or authorised banks to carry out transactions on behalf of clients dealing with foreign exchange. All the benefits of the MTSS are present under the rules of FEMA.
The RBI, through section 11 of FEMA, brings out rules and circulars for regulating authorised dealers. Authorised dealers are permitted to carry out transactions on behalf of clients dealing in foreign exchange. Authorised dealers have to abide by the rules of RBI, which is raised from time to time.
Under the Money Transfer Service Scheme, the following institutions and parties are involved:
Entity or NRI- An entity can be defined as a company under the Companies Act 2013 or previous company law. This can even involve a foreign company which is included under the definition of a company. A Limited Liability partnership which is established outside India can also come under the definition of an entity. A Non-Resident Indian (NRI) is a person who is resident outside India for more than 182 days. Under the Finance Act, 2020, an individual would be considered an NRI if the individual satisfies the criteria of staying in India for more than 120 days. However, if this is considered, then the individual must have an annual income of more than 15 Lakhs.
Overseas Principal- Any company or entity which is established abroad for carrying out money transfer activities are considered as overseas principals. Overseas Principle under the money transfer service scheme can satisfy the criteria of carrying out services related to money transfer activities or remitting any amount to India.
Indian Agent– An Agent in India is set up to receive funds from the overseas principal. An Indian Agent can be either classified into the following:
RBI- RBI is the primary regulatory institution that deals with establishing authorized dealers under the Foreign Exchange Management Act. The RBI brings out circulars and master directions from time to time which authorised dealers to have to comply with. Any issues related to Foreign Exchange Matters must be directed to the RBI.
Beneficiaries- Under the Money Transfer Service Scheme, beneficiaries are resident Indians and foreigners who receive funds through this scheme. Beneficiaries are allocated funds under the scheme only for specific purposes. An entity remits the funds through the overseas principal. Funds remitted are received by the Indian Agent. Once received in the account of the Indian agent, the funds are transferred to the beneficiary.
The RBI brought out the master direction that deals with transactions under the MTSS scheme. The master direction was issued in the year 2017. Under these guidelines, the power and authority of overseas principals and agents are included. Overseas principals have to abide by different guidelines from time to time. Apart from this, the scheme also brought out definitive guidelines when it applies to Indian agents who are established under this scheme.
The following guidelines are required to be followed by overseas principals as well as Indian agents under this scheme:
The Money Transfer Service Scheme would operate based on the initial agreement, which is decided between the parties in the transaction.
The following process would be followed under the MTSS scheme:
Basically, an authorised dealer or an authorised bank is allowed to be an Indian agent under the Money Transfer Service Scheme.
In order to satisfy the criteria to become an Indian agent under this scheme, the following has to be carried out:
The following documents would be required to be submitted by the applicant:
Foreign Direct Investment and Money Transfer Service Schemes include remittances which are sent from abroad. Though under FEMA, both these may be the same, when interpreting these terms they have different meanings.
Foreign Direct investment can be understood as any form of direct or indirect investment which is considered under FEMA. FDI is through a foreign investor or an NRI by subscribing to the shares of an Indian Company. FDI though it is considered as a remittance, it is majorly considered as an investment in an Indian company. There are a lot of restrictions when it comes to the operation of FDI. An Indian Company can receive FDI through two routes:
Money Transfer Service Scheme is an inward remittance. In contrast to FDI, this is a remittance that is formed out of a mutual agreement between the overseas principal and the Indian agency. The Indian agency is an authorised bank which is permitted to receive funds.
Under the MTSS, funds are transferred from the overseas principal to the Indian agent, for specific purposes. These funds can only be utilised for maintenance of family expenses of resident Indians. Apart from this, the maintenance of foreign tourists is also allowed through this.
Hence, both the above terms FDI and MTSS depict a different meaning even though the remittance is from abroad.
Read our article:Money Transfer from Overseas / NRIs to India