Current account & Capital Account Transactions under FEMA
1. At Macro level, the International Monetary Fund as well as RBI has to keep a record of the External Assets and liabilities. These record would indicate the net position of any country as to its foreign currency surplus / commitment over the rest of the countries in the world.
2. Keeping in mind the above purpose, FEMA contains two categories of the transactions, i.e. Capital Account Transactions and Current Account Transactions. These are defined in Section 2(e) and Section 2(j) respectively and governed by provisions of Section 5 and Section 6 of FEMA.
3. Definition of Capital Account Transactions –
(e) “capital account transaction” means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6;
4. Definition of Current Account Transactions –
(j) "current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,— (i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business, (ii) payments due as interest on loans and as net income from investments, (iii) remittances for living expenses of parents, spouse and children residing abroad, and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;
5. Accordingly, we can observe here that the concept of Capital Account Transaction and Current Account Transactions under FEMA is distinct and different from the concepts of Accounting and Income Tax. Here we have to see with an economic view point whether the transaction would alter the assets or liabilities, including contingent liabilities of a person vis a vis other country. Examples –
- Purchase of huge plant and machinery with upfront payment. In such case, as both the part of the transactions are squared up and no receivable or payable, then it would not alter the assets or liabilities, hence Current Account Transaction, though may be Capital Account Transaction under Accountancy and Income Tax.
- Equity Investment in other country – this will create Assets outside the country and would alter the asset liability position, hence it would be Capital Account Transaction.
6. There is no precise rule for classifying any transaction as Capital or Current, but one has to apply the above principal to the facts of the each case very carefully.
7. Regulation of Current account Transaction and Capital Account Transactions: - under FEMA as a basic rule –
· All current account transactions are permitted unless specifically prohibited; and
· All Capital Account Transactions are prohibited unless specifically permitted.
8. Now lets analyse the provisions of Section 6 of the FEMA (as amended by Finance Act 2015 w.e.f. 15th October 2019: -
9. Capital account transactions.
6. (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. (2) The Reserve Bank may, in consultation with the Central Government, specify— [(a) any class or classes of capital account transactions, involving debt instruments, which are permissible;] (b) the limit up to which foreign exchange shall be admissible for such transactions; [(c) any conditions which may be placed on such transactions:] [Provided that the Reserve Bank or the Central Government shall not impose any restrictions on the drawal of foreign exchange for payment due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business.] [(2A) The Central Government may, in consultation with the Reserve Bank, prescribe— (a) any class or classes of capital account transactions, not involving debt instruments, which are permissible; (b) the limit up to which foreign exchange shall be admissible for such transactions; and (c) any conditions which may be placed on such transactions.] (3) [***] (4) A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. (5) A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. (6) Without prejudice to the provisions of this section, the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. [(7) For the purposes of this section, the term "debt instruments" shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.]
10. Amendment by Finance Act 2015 has been highlighted in Italic in the above text of Section 6. Prior to this amendment, all the powers related to Capital Account Transactions were delegated to RBI. Now the regulatory powers related to Capital Account Transactions have been divided into two parts: -
- Capital Transactions involving Debt Instruments – with RBI
- Capital Transactions involving NON Debt Instruments – with Central Government. Accordingly Central Government has issued Foreign Exchange Management (Non-Debt Instruments) Rules 2019 in furtherace of the same RBI has issued Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
Non-Debt Instruments as defined under the per NDR Rules, means: - (i) all investments in equity instruments in incorporated entities: public, private, listed and unlisted; (ii) capital participation in LLP; (iii) all instruments of investment recognised in the FDI policy notified from time to time; (iv) investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts); (v) investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity; (vi) junior-most layer (i.e. equity tranche) of securitisation structure; (vii) acquisition, sale or dealing directly in immovable property; (viii) contribution to trusts; and (ix) depository receipts issued against equity instruments;
11. Whereas Debt Instruments are defined to means all instruments other than non-debt instruments as defined hereinabove.
12. By issuance of the above NDR Rules, the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 ("TISPRO Regulations") and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 has been repealed and now not applicable at all.
13. Summary analysis of provisions of Section 6 of FEMA
14. Section 6(4) of the FEMA is a special provision for returning Indian to keep and hold all the foreign assets outside India, which were acquired by him while he was resident outside India. This section is totally silent on the future convertibility as well as reinvestment of any income accrual on such permitted foreign assets. To put rest this confusion, after lot of representations, RBI has came out with AP (Dir Series) Circular on 09/01/2014 clarifying that returning Indians can continue to hold the foreign assets acquired earlier, all income on the same and also all types of conversion of the same into other assets as well.
15. Further controversy arises as to basically Section 6(4) covers foreign currency, foreign security or any immovable property. Whether provisions of Section 6(4) are applicable on assets other than specified in the said section such as moveable assets, interest in partnership firm etc.
16. Literal interpretation to above would give a restrictive meaning, in FEMA instead of literal rules of interpretation, intention is seen to be more important. Accordingly, having regard to the intention of section 6(4) of FEMA, one may content that this also covers all types of assets of the returning Indian.
17. Provisions of Section 6(5) are converse of the Section 6(4). This broadly covers the similar things for an outgoing person from India for assets acquired by him in India while being in India.
18. For regulation of Current Account Transactions, FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) RULES, 2000 have been notified and applicable. These rules classify the transactions into three Parts
(a) Prohibited Transactions – Schedule I
(b) Transactions with prior approval of Government – Schedule II
(c) Transactions with prior approval of RBI – Schedule III
19. Approval of RBI required in following cases:
For Resident Individuals:
i) If foreign exchange exceeding USD 250,000 requires prior permission from the Reserve Bank of India.
ii) If an individual remits any amount under the LRS in a financial year then the applicable limit for such individual would be reduced from USD 250,000. The procedure for drawal or remit of any foreign exchange shall be the same as applicable for remitting any amount under LRS.
For other than resident Individuals:
If payment is made out of RFC (Resident foreign Currency) Account of the remitter above limits will not be applicable.
20. Remittances subject to prior approval of the Central Government:
21. Other Cases:
a) Bids in Foreign Currency for Projects to be executed in India:
Residents are permitted to make or to receive payments in foreign exchange, in respect of global bids where the Central Government has authorized above.
b) Liberalization of Foreign Technical Collaboration Agreements:
AD Category I bank may permit drawal of foreign exchange by persons for payment of royalty and lump-sum payment under technical collaboration agreements without any approval of Ministry of Commerce and Industry, Government of India.
c) Remittance for Purchase of Trademark or Franchise in India:
AD Category I bank may permit drawal of foreign exchange by person for purchase of trademark or franchise in India without approval of RBI.
d) Issue of Guarantee - Import of Service:
AD Category I banks are permitted to issue guarantee, to secure a direct contractual liability arising out of a contract between a resident and a non-resident, for amount not exceeding USD 500,000 or its equivalent in favour of a non-resident service provider, on behalf of a resident customer who is a service importer.
22. Prohibited Current Account Transactions:
i. Remittances out of lottery winnings.
ii. Remittance of income from racing/ riding etc. or any other hobby.
iii. Remittance for purchase of lottery tickets, banned/ prescribed magazines, football pools, sweepstakes, etc.
iv. Payment of commission on exports made towards equity investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies.
v. Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
vi. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.
vii. Payment related to “Call Back Services” of telephones.
viii. Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.
ix. Drawal of foreign exchange by any person is prohibited for travel to Nepal and/ or Bhutan and/ or a transaction with a person resident in Nepal or Bhutan.
23. Permissible capital account transactions - The permissible capital account transactions are defined under the following two categories:
For Persons Resident in India:
For Person Resident outside India:
24. Export, and import of currency/currency notes :
Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 prescribed the following limits:
i. For Export of Currency/Currency Notes :
Indian Currency Notes up to Rs 25000 per person shall be allowable to a person resident in India to take outside India (Other than Nepal & Bhutan) as well as to a person resident outside India and visiting India (Other than Pakistan & Bangladesh).
ii. For Import of Currency/Currency Notes :
- In case of Temporary visit outside India of resident person or a person visiting India may bring Indian Currency up to Rs 25000.
- Aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers’ cheques brought in India by a person resident in India or by a person resident outside India shall not exceed USD 10000.
- Aggregate value of foreign currency notes brought in India by a person resident in India or by a person resident outside India shall not exceed USD 5000.
A person resident outside India shall not make investment in the following sectors:
Business of chit fund,
Agricultural or plantation activities,
Real estate business or construction of farm house,
Trading in transferable development rights.