FEMA 1999: Introduction, Objectives and Key Definitions

Understand FEMA 1999: Introduction, Objectives and Definitions

Key rules to remember

Short title, extent, application (Section 1)

Extends to the whole of India; applies also to branches, offices and agencies outside India owned or controlled by a person resident in India, and to contraventions outside India by persons to whom the Act applies

Commenced on 1 June 2000 by notification dated 1 May 2000. Different dates may be appointed for different provisions.

Person resident in India (Section 2(v))

(i) person residing in India for more than 182 days during the preceding financial year (with exclusions); (ii) any person or body corporate registered or incorporated in India; (iii) office, branch or agency in India owned or controlled by a person resident outside India; (iv) office, branch or agency outside India owned or controlled by a person resident in India

The 182-day test applies to individuals and uses the preceding financial year. The test is 'more than' 182 days.

Exclusions from the 182-day limb

Excluded: person who has gone out of or stays outside India for taking up employment, for carrying on a business or vocation outside India, or for any other purpose indicating intention to stay outside India for an uncertain period. Also excluded: person who has come to or stays in India otherwise than for employment, business or vocation in India, or other purpose indicating intention to stay for an uncertain period

So intention matters. Days alone do not decide residence.

Person resident outside India (Section 2(w))

A person who is not resident in India

It is a residual definition.

Authorised person (Section 2(c))

Authorised dealer, money changer, off-shore banking unit or any other person authorised under Section 10(1) to deal in foreign exchange or foreign securities

Section 3(a) bars dealing with anyone who is not an authorised person.

Foreign exchange (Section 2(n))

Foreign currency, plus deposits, credits and balances payable in foreign currency, plus drafts, travellers cheques, letters of credit or bills of exchange expressed in Indian currency but payable in foreign currency, plus those drawn by banks, institutions or persons outside India but payable in Indian currency

Foreign currency means any currency other than Indian currency (Section 2(m)).

Capital account transaction (Section 2(e))

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

It includes transactions referred to in Section 6(3).

Current account transaction (Section 2(j))

A transaction other than a capital account transaction; includes payments for foreign trade, business, services and short-term banking and credit; interest on loans and net income from investments; remittances for living expenses of parents, spouse and children abroad; expenses for foreign travel, education and medical care of parents, spouse and children

It is defined by exclusion, so first test whether it is a capital account transaction.

Export and import (Section 2(l), 2(p))

Export: taking goods out of India to a place outside India, or providing services from India to a person outside India. Import: bringing any goods or services into India

Both cover goods and services.

Person (Section 2(u))

Includes individual, HUF, company, firm, AOP or BOI (incorporated or not), every artificial juridical person, and any agency, office or branch owned or controlled by such person

The definition is inclusive, so it is wide.

Section 4 rule on holding

Save as otherwise provided in the Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or immovable property situated outside India

Section 6(4) permits holding where the asset was acquired or held while resident outside India, or inherited from a person resident outside India.

How to solve FEMA 1999: Introduction, Objectives and Definitions questions

1. 1Identify what is asked: extent and application, objectives or FERA contrast, a definition, or classification of a person or transaction.
2. 2For a person, test residence. For an individual, check days in India in the preceding financial year, then the exclusions based on purpose and intention. For a company, firm or body, check whether it is registered or incorporated in India.
3. 3For an office, branch or agency, check where it sits and who owns or controls it. This decides limbs (iii) and (iv) of Section 2(v).
4. 4For a transaction, ask whether it alters assets or liabilities outside India of a resident, or in India of a non-resident. If yes, it is a capital account transaction. If not, it is a current account transaction.
5. 5For a payment or receipt, check whether an authorised person is involved. Then apply Section 3 or Section 4, noting the 'save as otherwise provided' exceptions.
6. 6Quote the exact definition wording and name the section only where you are sure of it.
7. 7Conclude in one line: resident or not, current or capital, permitted or prohibited.

Quickest way: Residence and transaction classification in 60 seconds

Common mistakes in FEMA 1999: Introduction, Objectives and Definitions

• Treating 182 days or more as the test.

  Students blend this with other residence rules they know.

  Fix: Write 'more than 182 days during the preceding financial year', exactly as in Section 2(v)(i).

• Deciding residence only on days spent in India.

  The exclusions in sub-clauses (A) and (B) are skipped.

  Fix: After the day count, check the purpose of stay: employment, business or vocation, or an intention to stay for an uncertain period.

• Saying a foreign company's Indian branch is a non-resident.

  Students look at the owner's residence and ignore limb (iii).

  Fix: An office, branch or agency in India owned or controlled by a non-resident is itself a person resident in India.

• Calling Section 1 application limited to India's territory.

  The words 'extends to the whole of India' are remembered, but sub-section (3) is forgotten.

  Fix: Add that the Act applies to branches, offices and agencies outside India owned or controlled by a resident, and to contraventions outside India by persons to whom it applies.

• Classifying education or medical expenses abroad as capital account.

  Large foreign remittances feel like capital movements.

  Fix: Section 2(j)(iv) lists expenses for foreign travel, education and medical care of parents, spouse and children as current account transactions.

• Stating FEMA as a criminal-control law like FERA.

  Students rely on memory of FERA's tough reputation.

  Fix: Contrast clearly: FERA was about conservation and control; FEMA is about facilitating external trade and payments and managing the foreign exchange market.

Worked examples