Import and export are essential components of the aggregate trade that occurs in India. Import-export involves trading with multiple countries to allow businesses to grow and expand in global markets. Moreover, import allows the country to fulfil the domestic demand for a product not indigenously produced or produced in limitation.
While import and export are important trading activities, some rules and regulations are required to govern them. These rules and regulations prevent disputes and ensure that the trade is carried out fairly. The government of India’s Foreign Exchange Management Act (FEMA), 1999 governs foreign trade and exchange policies.
Read on for details.
The FEMA Act 1999 lays down regulations that empower the Reserve Bank of India and the government to formulate rules governing foreign trade and currency exchange.
The Foreign Exchange Management Act was passed in 1999 and came into effect on June 1, 2000. The act regulates the inflow and outflow of an international currency in the Indian economy.
The main objectives of the Foreign Exchange Management Act, 1999, are as follows:
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Some of the salient features and provisions under FEMA are as follows:
The FEMA was established for a liberalised foreign trade and forex policy to bolster the international participation of India.
The rules and regulations contained in the Foreign Exchange Management Act are applicable throughout India. Moreover, if a resident of India owns any agency, office, or branch outside the country, FEMA rules would also apply to them.
Here’s a list of transactions and categories to which FEMA rules apply:
While the FEMA contains a list of regulations, some of the most common and important ones are as follows:
Foreign exchange transactions in India can be divided into two categories. They are described as follows:
Capital account transactions are those transactions that are capital in nature. For instance, investments in a foreign asset or an international investment in India are of a capital nature and are entered into the capital account.
On the other hand, current account transactions are those done in the regular course of business. Such transactions involve the inflow and outflow of an international currency in India for international trade and payment. For example, payment made for exporting or importing goods would be recorded in the current account.
Transactions in the current account can be categorised into three distinct heads. These are as follows:
Every individual engaged in foreign trade and payment must follow FEMA guidelines dictating the transaction. Failure to comply with the rules would result in penalties. This penalty is computed in absolute amounts and incurs a considerable expense.
The penalty is calculated as thrice the amount involved in violating the FEMA rules up to a maximum of Rs. 2 lakh. Moreover, if you continue violating the regulations of FEMA, you might have to bear an additional penalty of Rs. 5,000/day for each day that you violate the rules.
Before the Foreign Exchange Management Act was passed in 1999, foreign trade and exchange were governed under another act called the Foreign Exchange Regulation Act (FERA). The FERA was passed in 1973, and it was implemented on January 1, 1974. This act laid down strict and rigid rules with respect to foreign trade. However, in 1991, the liberalisation process started. This process relaxed various rules on foreign exchange and international trade to promote economic development. As such, the government abolished FERA and replaced it with FEMA.
Also Read: What is Capital Expenditure (CapEx) and How Does it Work?
The FERA and FEMA Acts are quite different from one another. The differences are as follows:
FERA | FEMA |
The act was passed in 1973 and came into effect from 1974 | The act was passed in 1999 and came into effect from 2000 |
FERA had 81 Sections | FEMA 1999 has only 49 sections |
FERA dealt with rules pertaining to the regulation of international payments | FEMA has a more comprehensive scope. It deals with enhancing the forex reserves of the country through promotion of foreign trade and payments |
FERA believed that forex was a limited resource | FEMA considers forex to be an asset |
The concept of ‘Authorised Person’ is narrow | The concept is wide |
Violation of rules was a criminal offence | Violation of rules is a civil offence |
RBI’s approval was needed for the transfer of funds for external use | No approval is needed under FEMA |
If you are engaged in the import and export business or trade in foreign currency, you’ll be well-advised to get complete clarity on the Foreign Exchange Management Act. Know the FEMA rules about your transaction so that you can follow the rules and avoid any violation. Remember, violations incur penalties which, in turn, incur additional expenses. So, follow the FEMA rules and avoid penalties for engaging in foreign trade easily.
Ans. The head office of FEMA is located in New Delhi. It is called the Enforcement Directorate.
Ans. No, FEMA also allows the Central government to formulate and regulate foreign exchange policies in India.
Ans. Yes, if you are trading in forex you would have to follow FEMA rules
Ans. An Authorised Person under the FEMA Act can be the following types of entities:
• State Co-operative Banks
• Commercial Banks
• Urban Co-operative Banks
• Co-operative Banks
• Regional Rural Banks
• Upgraded FFMC
• Selected financial institutions
• Other types of institutions eligible to act as an Authorised Person
• Department of Post
Ans. The Head Office or the Enforcement Directorate of FEMA is located in New Delhi. Under the Head Office are five zonal offices held by Deputy Directors. These offices are located in Mumbai, New Delhi, Kolkata, Jalandhar and Chennai. Each of these zonal offices are then subdivided into seven sub-zonal offices and five field units. The sub-zonal offices are headed by Assistant Directors and the field units are headed by Chief Enforcement Officers.
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