Comparison of FERA & FEMA

If you learn only methods you will be tied to your methods, but if you learn principles you can device your own methods.

Agenda
Introduction of FERA Why FERA Objectives of FERA FEMA Structure of the FEMA Act Case study of FEMA Current A/c Transaction Capital A/c Transaction Prohibited Transactions Transactions with CG Approval Comparison between FERA & FEMA

FERA
FERA- AN ACT
To amend the law regulating certain payments, dealings in foreign exchange, effecting foreign exchange and import and export of currency, for the conservation of the foreign exchange resource of the country and the proper utilization thereof in the interests of the economic development of the country.

FERA
Regulated in India by the Foreign Exchange Regulation Act (FERA),1973. Consisted of 91 sections. FERA Emphasized strict exchange control. Control everything that was specified, relating to foreign exchange Law violators were treated as criminal offenders. Aimed at minimizing dealings in foreign exchange and foreign securities.

Why FERA?
FERA was introduced at a time when foreign exchange (Forex) reserves of the country were low, Forex being a scarce commodity. FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI). FERA primarily prohibited all transactions, except ones permitted by RBI.

Objectives
To regulate certain payments. To regulate dealings in foreign exchange and securities. To regulate transactions, indirectly affecting foreign exchange. To regulate the import and export of currency. To conserve precious foreign exchange. The proper utilization of foreign exchange so as to promote the economic development of the country.

FOREIGN EXCHANGE MANAGEMENT,1999[FEM A

FEMA is an act to consolidate and among the law relating to Foreign Exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of Foreign exchange market in India. Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the free flow of foreign exchange in India.

The Objectives are as follows

To regulate impact and export of currency To regulate acquisition holding etc .of immovable property in India by NRIs. To regulate holding of property (immovable) outside India. To regulate certain payments. To regulate Foreign companies. To regulates dealing in FE and securities. To regulate the transactions indirectly affecting FE. To regulate employment of foreign nationals. To converse the FE resources of the country and to utilize the same is the interest of the economic development of the country.

STRUCTURE OF THE FEMA (ACT)

FEMA has in all 49 sections of which 9 (section 1 to 9) are substantive and the rest are procedural/administrative. Thus RBI is entrusted with the administration and implementation of FEMA

The FEMA act extends to the whole of India. The main provision of the Act are as follows: Section 2: Clarity on several definitions and terms used in the context of foreign exchange. Section 3:Prohibits dealing in Foreign Exchange Section 4 Holding of foreign Exchange Section 5 Current account Transaction Section 6 : Capital account Transaction Section 7: Export of Goods and Services Section 8 : Realisation of Repatriation and Foreign Exchange

Case study: Kites

Allegations: 1.Used foreign exchange meant for production work to meet personal expenses 2.Carried junk film reels from India for the shoot but used fresh reels bought in the US 3.Paid Spectrum Entertainment just $ 4.3 million against pending bills of $ 5.9 million

Background of case
Production budget of Rs. 60 crore Sold for Rs. 110 crore in worldwide rights to the Reliance Group Film shot in Maldives, Mexico and the US Spectrum Entertainment hired by Roshan to manage all outdoor shoots of Kites in the US Reels were bought in US and cost Roshan Rs. 50 lakhs

evaluation
1. The production house is gaining tax benefits showing personnel expenditure as creative expenses 2. Evaded duty on Reels, bought from US, when returned to India 3. Spectrum has all the challans of withdrawals by Roshan

conclusions
1. The personal expense, if proved, must only invite minimal penalty of 3 times the duty evaded 2. Spending of Rs. 50 lakhs in US is violation of FEMA and can invite penalty of upto 3 times the original amount applicable 3. The Spectrum matter will not be taken up by the ED without a proper evaluation of the situation between

Rule 3 read with Schedule I: Prohibited Transactions

Pymt for travel to Nepal and/or Bhutan Remittance out of income from :lottery winnings, or racing/riding etc., or any other hobby; Remittance for purchase of :- lottery tickets, or banned/ prescribed magazines, football pools, sweepstakes etc. Pymt of comm. on exports made

 Pymt of imports by a Govt. Deptt. or a PSU on CIF basis Cultural Tours Remittance of prize money/ sponsorship of sports activity abroad > US$ 1,00,000 (no restriction if pymt made by International /National/ State level Sports Bodies) Pymt for health insurance from a company abroad

Rule 4 read with Schedule II: Transactions with CG Approval

Rule 5 read with Schedule III: (if beyond limits)

Similarities between FERA & FEMA

The Reserve Bank of India and central government would continue to be the regulatory bodies. Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and

Comparison FERA & FEMA

Differences Emphasis FERA On regulation of foreign exchange FEMA On management of foreign exchange

Situation

Stringent controls were required on the use of foreign exchange

Stringent controls are not required now

Permission

Need to take permission No need for seeking the of RBI in connection with permission of RBI except remittances in case of Section 3 Restrictions on drawals of foreign exchange for the purpose current account transactions Section 5 removes all restrictions on drawals of foreign exchange

Restrictions

Comparison FERA & FEMA

DIFFERENCES FERA PROVISIONS more complex FEATURES Presumption of negative FEMA sections. intention These presumptions of Mens Rea and abatement FERA consisted of 91 sections, and was FEMA is much simple, and consist of only 49 (Mens Rea ) and joining hands in have been excluded in FEMA offence (abatement) existed in FERA NEW TERMS IN Terms like Capital Account Transaction, Terms like Capital Account Transaction, current FEMA current Account Transaction, person, account Transaction person, service etc., have been service etc. were not defined in FERA. defined in detail in FEMA. definition of Authorized person has been

DEFINITION OF Definition of "Authorized Person" in The AUTHORIZED PERSON MEANING "RESIDENT" WITH INCOME FERA was a narrow one ( 2(b)

widened to include banks, money changes, off shore banking Units etc. (2 ( c )

OF There was a big difference in the The provision of FEMA, are in consistent with income definition of "Resident", under FERA, Tax Act, in respect to the definition of term " Income Tax Act Resident". Now the criteria of "In India for 182 days" to make a person resident has been brought under FEMA. Therefore a person who qualifies to be a nonresident under the income Tax Act, 1961 will also be considered a non-resident for the purposes of application of FEMA, but vice-a-versa may not hold true.

AS COMPARED and TAX ACT.

PUNISHMENT

Comparison FERA & FEMA

Any offence under FERA, was a criminal Here, the offence is considered to offence , punishable with imprisonment be a civil offence only punishable as per code of criminal procedure, 1973 with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.

QUANTUM PENALTY.

OF The monetary penalty payable under FERA, Under FEMA the quantum of penalty has was nearly the five times the amount been considerably decreased to three times the amount involved. involved.

APPEAL

An appeal against the order of "Adjudicating The appellate authority under FEMA is office", before " Foreign Exchange Regulation the special Director ( Appeals) Appeal Appellate Board went before High Court against the order and of Adjudicating Director Authorities special

(appeals) lies before "Appellate Tribunal for Foreign Exchange." An appeal from an order of Appellate Tribunal would lie to the High Court. (sec 17,18,35) RIGHT ASSISTANCE DURING OF FERA did not contain any express provision FEMA expressly recognizes the right of on the right of on impleaded person to take appellant to take assistance of legal LEGAL legal assistance practitioner or chartered accountant (32)

THANK YOU!!!