The Foreign Exchange Management Act, 1999 (Part-2)
Introduction : It is important to know that how entity is required to comply with the law, in case where entity is undertaking foreign currency transactions. Our professionals through issuing article in different part, will try to cover the entire provisions relating to this law.
- Current Account Transactions: The term ‘Current Account transaction has been negatively defined i.e., any transaction other a capital account will be treated as current account transaction. Further the following transaction are specifically included;
- Mr. R imported a machinery from France. The said machinery is installed in India Whether it is current account transaction or capital account transaction?
It has been specified that if any transaction is entered by person resident in India which has a characteristic of altering any asset, liability or contingent liability outside India than it will be treated as capital account transaction; however, when once the asset is imported into India the same will not fall under above definition and the therefore for importer it will be treated as current account transaction.
What will be the scenario for seller of France?
As, after selling the machine he does not hold any right in it nor he is liable for anything therefore, the said will not fall under the above definition and the therefore for importer it will be treated as current account transaction.
What if such machine has been purchase on credit of 6 months?
In such case for importer there will be liability outside India; and it is asset for the seller of France; however, it has been stated that such transaction which are in nature of short-term banking or credit facilities in ordinary course of business; than it will be treated as current account transactions.
What if credit period is of 12 months instead of 6 months?
In said case the transaction will treated as loan; as it has been prescribed under rules that short term borrowing period is limited to 6 months. Hence, the said transaction will be purchase of asset on loan will be treated as capital account transaction.
- Mr. Hari is situated in India; he has taken loan from Mr. Sahu who is situated at Dubai; and the said is invested in one wealth management company situated in Dubai. He does not bring back that money to India.
Whether the transaction will be covered under FEMA?
As it has been specified that any transaction entered by person resident in India which has an effect of altering assets, liability or contingent liability situated outside India the said transaction will be treated as capital account transaction. In the give case the transaction of loan and investment qualifies the definition of capital account transaction.
Further Income from Investment and Interest paid on Loan has been specifically covered under the definition of current account transaction, irrespective of fact that the same is reimbursed to India or not.
What if transaction undertaken by assessee is in nature of gift?
In that case as gift doesn’t create any asset or liability on the giver or recipient, and therefore it will be treated as current account transaction.
In part three we will continue with the other provision relating to Foreign Exchange Management Act.