WHAT IS FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)?[i]
The Foreign Exchange Management Act is an act passed and enacted by the Parliament of India to consolidate and amend 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. This act makes offences related to foreign exchange civil offenses. It extends to the whole of India, replacing FERA, which had become incompatible with the pro-liberalization policies of the Government of India.
FEMA is a regulatory mechanism that enables the RBI to pass regulations and the Central Government to pass rules relating to foreign exchange in tune with the Foreign Trade Policy of India.
FEATURES OF FEMA
The features of FEMA can be classified in the following points:
- Free transactions on current account subject to reasonable restrictions that may be imposed.
- Activities like payment made to any person who is not an Indian citizen shall be restricted. FEMA does not apply to the Indian citizens who resides outside India. This is checked by the number of days a person stays in India for more than 182 days in the preceding financial year.
- It specifies the areas for holding of forex that required specific permission from the RBI or the government.
- Only residents of India shall be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immoveable property abroad if the currency or property was owned when that person was living outside India, or when it was inherited from someone living outside India.
- Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, if necessary.
WHAT ARE THE OBEJCTIVES OF FEMA?
The objective of FEMA is to liberalize the Indian economy by encouraging foreign trade and payments. FEMA can be classified into two categories:
- CAPITAL ACCOUNT TRANSACTIONS: deals with all capital transactions and the inflow and outflow of money to and from India.
- CURRENT ACCOUNT TRANSACTIONS: deals with all trade of merchandise as a indicator of an economy’s status.
TO WHOM DOES IT APPLIES?
FEMA applies to the whole of India or any branch or office or agency which is situated outside of India, but is owned or administered by a person who is a resident in India.[ii]
If discussed in depth, FEMA is applicable to three different types of categories:
- PERSON: this includes: an individual, a company, a firm, a Hindu undivided family, an association of persons or a body of individuals whether, any agency office or branch owned or administered by that person.
- A PERSON WHO IS A RESIDENT IN INDIA: it applies to a person who is residing in India for more than 182 days during the period of a preceding financial year.
The exceptions to this are: if that person takes up employment outside India; or carries on a business outside India; or if due to certain reasons it would indicate that his intention to stay outside India is for an uncertain period.
OR, any person who has come to or stays in India for: taking up employment in India, carrying on any business in India, or due to certain reasons it would indicate that his intention to stay in India is for an uncertain period.
OR, any person/body registered or incorporated in India.
OR, any branch of office or agency in India owned and administered by a person residing outside India.
- A PERSON RESIDENT OUTSIDE INDIA: it applies to a person who is not an Indian resident or not a resident in India.
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