The Indian currency is restricted, that is, remittance in or outside India are regulated under the Indian exchange control law. Foreign Exchange Management Act, 1999 (FEMA) is an important legislation governing trade and remittance of funds in or outside India. The federal bank, i.e., the Reserve Bank of India (RBI) administers foreign exchange regulations in consultation with the Government of India to set out exchange-control policy and issues rules and regulations.
FEMA applies to citizens of India, associate branches or subsidiaries of corporations registered or incorporated in India, all branches, offices and agencies outside India owned or controlled by a person who is a resident of India. FEMA classifies foreign exchange transactions into two:
- Capital account transaction: A transaction that alters the assets or liabilities, including contingent liabilities, in or outside India of a person resident outside or in India, respectively. RBI in consultation with the Government of India has listed out permissible capital transactions, for example, an investment in foreign securities outside India by a person resident in India, transfer of immovable property outside India by a person resident in India or in India by a person resident outside India subject to conditionalities.
- Current account transaction: A transaction other than a capital account transaction is a current account transaction.
The RBI regulations may place conditions or have limitation with regards to the nature, amount or nationality of the individual carrying out a transaction. It is therefore important that correct forms and right approvals are sought from the RBI on the inward or outward remittances for the above transactions as FEMA sets out rigorous penalty(ies) for an offence.
The term under the foreign exchange law cannot mean the same as under Indian tax law unless specifically mentioned. As I have discussed the term “resident” under the Indian tax law earlier, but the definition is not same as under the foreign exchange law. The later places an additional test of “intent” of the individual. Under FEMA, a person will be a nonresident if such person is leaving India for the purposes of taking an employment outside India, carrying on any business outside India or where the intention to stay outside India is uncertain during the financial year. Similarly, a person is an Indian resident where he comes to India for the purpose of employment in India, carrying on business in India or where the intention to stay in India is uncertain. However, under the Indian tax law, a person moving out of India for the purpose of employment will be an Indian resident if he resides in India for 182 days or more. Refer to our whitepaper titled Interaction of Indian and U.S. Tax Laws to understand in further detail the application of foreign exchange law to funds flowing in and out of India with sections on RBI.