Guide to .. Tax Management ,Tax Planning and Tax Saving
 

Permissible and Prohibited Current Account Transactions in Case of NRI

1. Basic Introductions

Section 5 of the FEMA provides that any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. However, the proviso to Section 5 provides that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transaction as may be prescribed. The expression “current account transaction” as per Section 2(j) of FEMA is defined as under:
2(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, —

  1. payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,

  2. payments due as interest on loans and as net income from investments,

  3. remittances for living expenses of parents, spouse and children residing abroad, and

  4. expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Hence, the Government of India have accordingly issued a Notification No. GSR 381(E) dated 3.5.2000 notifying the Foreign Exchange Management (Current Account Transactions) Rules, 2000 in terms of which drawal of exchange for certain transactions has been prohibited and restrictions have been placed on certain transactions.

2. Prohibited Categories Of Current Account Transactions

In terms of Rule 3 of the aforesaid Rules, withdrawal of exchange for the following transactions is prohibited:

  1. Travel to Nepal or Bhutan.

  2. Transactions with a person resident in Nepal or Bhutan (unless specifically exempted by Reserve Bank by general or special order).

  3. Remittance out of lottery winnings.

  4. Remittance of income from racing/riding etc., or any other hobby.

  5. Remittance for purchases of lottery tickets, banned/prescribed magazines, football pools, sweepstakes, etc.

  6. Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.

  7. Remittance of dividend by any company to which the requirement of dividend balancing is applicable.

  8. Payment of commission on exports under Rupee State Credit Route.

  9. Payment related to “Call Back Services” of telephones,

  10. Remittance of interest income on funds held in Non-Resident Special Rupee(NRSR) account scheme.

Detailed provisions can be seen in Schedule I annexed to the aforesaid Rules.

NRI Tax Planning & Tax Saving

3. Prior Approval Of Government Of India Required For Certain Transactions

There are certain transactions which are included in Schedule II to the Rules, in respect of which Rule 4 of the aforesaid Rules provide that prior approval of the Government of India is required for remittance of such Current Account Transactions. Such items include cultural tours, advertisements, hiring charges of transponders, membership of P&I Club, etc. However, Rule 4 does not apply where the payment is made out of funds held in RFC Account or EEFC Account of the remitter.

4. Prior Approval Of Reserve Bank Required For Certain Current Account Transactions

Rule 5 of the aforesaid Rules provide that no person shall draw foreign exchange for a transaction included in the Schedule III without prior approval of the Reserve Bank. For the latest in formation please refer to the Exchange Control Manual or RBI circulars. There are various monetary limits laid down for certain items like gift remittance exceeding US$ 5,000 per beneficiary per annum, donation exceeding US$ 5,000 per annum per beneficiary, etc. However, it is provided that this Rule does not apply where the payment is made out of funds held in RFC Account or EEFC Account of the remitter. Resident individuals can acquire foreign exchange up to $ 10,000 per calendar year for their overseas travel except for visits to Nepal and Bhutan. For the latest relaxations please contact the Reserve Bank of India.

5. Liberalisation Of Current Account Transactions

Vide RBI circular No. 76 dated 24-2-2004 provisions relating to current account transactions have been liberalised. The following is the extract of the circular:

  1. Attention of Authorised Dealers (ADs) is invited to Annexure I of A.D. (M.A. Series) Circular No. 11 dated May 16, 2000 with regard to Rules relating to Current Account Transactions.

  2. As a step towards further liberalisation, it has been decided to remove the following restrictions on remittances by residents.

(I) Remittance for securing Insurance for Health from a Company Abroad
In terms of item No. 10 of Schedule II, payment for securing insurance for health from a company abroad requires the approval of Ministry of Finance (Insurance Division). It has since been decided that Government’s approval would not be required and Authorised Dealers (ADs) may freely allow such remittances.

(ii) Remittance by Artiste
In terms of item No. 11 of Schedule III, remittance by artistes e.g. wrestler, dancer, entertainer, etc., requires prior approval of RBI. Henceforth, ADs may freely allow such remittances.

(iii) Commission to Agents abroad for Sale of Residential Flats/Commercial Plots in India
In terms of item No. II of Schedule III, remittance by way of commission to agents abroad for sale of residential flats/commercial plots in India, exceeding 5 per cent of the inward remittance requires RBI’s approval. ADs may freely allow such remittances upto USD 25,000 or 5 per cent of the inward remittance, per transaction, whichever is higher.

(iv) Short-term Credit to Overseas Offices of Indian Companies
In terms of item No. 12 of Schedule III, short term credit to overseas offices of Indian companies requires prior approval of RBI. Henceforth, ADs may allow such facility without RBI’s approval.

(v) Remittance for Advertisement on Foreign Television Channels
In terms of item No. 13 of Schedule III, RBI’s prior approval is required in cases where the export earnings of the advertiser are less than 1 0 lakhs during each of the preceding 2 years. Henceforth, ADs may freely allow remittances for advertisement on foreign television channels.

(vi) Remittance of Royalty and Payment of lump sum fee
In terms of item No.14 of Schedule Ill, RBI’s prior approval is required if the agreement for technical collaboration has not been registered with RBI. Henceforth, ADs may allow remittances for royalty and payment of lump sum fee provided the payments are in conformity with the norms as per item No. 8 of Schedule II i.e. royalty does not exceed 5 per cent on local sales and 8 per cent on exports and lump sum payment does not exceed USD 2 million.

(vii) Remittance for Use and/or Purchase of Trademark/Franchise in India
In terms of item No. 16 of Schedule III, RBI’s prior approval is required for remittance towards use and/or purchase of trademark/franchise in India. Henceforth, ADs may freely allow remittances for use of trade mark/franchise in India. However, RBI’s prior approval will continue to be required for remittance towards purchase of trademark/franchise.

(viii) Remittance of Hiring Charges of Transponders
In terms of item No. 18 of Schedule III, RBI’s prior approval is required for remittance of hiring charges of transponders. This item stands shifted to Schedule II of the Foreign Exchange Management (Current Account Transaction) Rules, 2000 and henceforth, the proposal for hiring of transponders by TV Channels and internet service providers will require prior approval of the Ministry of Information & Broadcasting.

3. Necessary amendments to the Foreign Exchange Management (Current Account Transactions) Rules, 2000 are being notified separately.

4. Authorised Dealers may bring the contents of this circular to the notice of their constituents concerned.

5. The directions contained in this circular have been issued under Section 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).

Reference may also be made to RBI’s AP (DIR Series) Circular No. 64, dt. 4.2.2004, No. 80 dt. 18.3.2004 and No. 38 dt. 31.3.2005 as there is a Liberalised Remittance Scheme of US $25,000 per calendar year for any permissible current account or capital account transactions or a combination of both.

Besides, Resident Indians going abroad for employment can acquire foreign exchange up to $1,00,000. Similarly, for medical treatment outside India, a resident individual can obtain foreign exchange up to $1,00,000 by giving a self-declaration. Students can acquire foreign exchange up to $ 1,00,000 per academic year for meeting their tuition and other costs in respect of their studies overseas. This can be obtained from the authorized dealers. Unspent foreign exchange has to be surrendered within 90 days from the date of return of the traveller. For traveller’s cheques it is 180 days. However, upto $ 2,000 can be retained for subsequent travels.

The RBI has enhanced the limit of US$ 1,00,000 to US$ 2,00,000 under the Liberalised Remittance Scheme for resident individuals.

For latest changes, if any, please refer to the RBI.

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