FOREIGN EXCHANGE – CURRENT ACCOUNT TRANSACTIONS

Section 2(j) of Foreign Exchange Management Act, 1999 (‘Act’ for short) defines the term ‘current account transaction’ as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes-

• Payments due in connection with foreign trade, other current business, services and short term banking and credit facilities in the ordinary course of business;
• Payments due as interest on loans and as net income from investments;
• Remittances for living expenses of parents, spouse and children residing abroad; and
• Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

The Government of India, by virtue of powers conferred by Section 5 and Section 46(2)(a)(1) of the Act framed the Foreign Exchange Management (Current Accountant Transactions) Rules, 2000 which came into effect from 01.06.2010.

Transactions which are prohibited

Rule 3 provides that the drawal of foreign exchange by any person for the following purposes is prohibited:

• Remittance out of lottery winning;
• Remittances of income from racing/riding etc., or any other hobby;
• Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc.,
• Payment of commission on exports made towards equity investment in Joint Ventures/Wholly owned subsidiaries abroad of India companies;
• Remittance of dividend by any company to which the requirement of dividend balancing is applicable;
• Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco;
• Payment related to ‘call back services’ of telephones;
• Remittance of interest income on funds held in Non resident Special Rupee Scheme account;
• A travel to Nepal and/or Bhutan;
• A transaction with a person resident in Nepal or Bhutan.  (This may be exempted by RBI subject to such terms and conditions as it may consider necessary to stipulate by general or special order).

Transactions requiring prior approval of Government of India

Rule 4 provides that no person shall draw foreign exchange for the following transactions without prior approval of the Government of India:

• Cultural tours;
• Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US $ 10,000) by a State Government and it s Public Sector Undertakings;
• Remittance of freight of vessel charted by a PSU;
• Payment of import through ocean transport by a Government Department or a PSU on c.i.f. basis;
• Multi-modal transport operators making remittances to their agents abroad;
• Remittance of hiring charges of transponders by-

• TV channels;
• Internet service providers.

• Remittances of container detention charges exceeding the rate prescribed by Director General of Shipping;
• Remittance of prize money/sponsorship of sports activity abroad by a person other than international/national/state level sports bodies, if the amount involved exceed US $ 100000;
• Remittance for membership of P&I Club.

This rule is not applicable for the payments made out of funds held in Resident Foreign Currency Account of the remitter.

Transactions requiring prior approval of RBI

For individuals

Any individual can avail foreign exchange facility for the following purposes within the limit of US$ 250000 (Rule 5)-

• Private visits to any country (except Nepal and Bhutan);
• Gift or donation;
• Going abroad for employment;
• Emigration;
• Maintenance of close relatives abroad;
• Travel for business, or attending a conference or specialized training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up;
• Expenses in connection with medical treatment abroad;
• Studies abroad;
• Any other current account transaction.

If the transaction exceeds US$ 250000 the prior approval of RBI is required.

The individual may avail of exchange for an amount in excess of the limit prescribed under the Liberalized Remittance Scheme for the following transactions:

• Emigration;
• Expenses in connection with medical treatment abroad;
• Studies abroad,

if it is required by a country of emigration, medical institute offering treatment or the university respectively.

If an individual remits any amount under the Liberalized Remittance Scheme in a financial year, then the applicable limit for such individual would be reduced by the amount so remitted.

A resident but not permanently resident in India and is a citizen of a foreign state other than Pakistan or is a citizen of India, who is on deputation to the office or branch of a foreign company or subsidiary or joint venture in India or such foreign company may make remittance up to his net salary.

A person other than an individual may also avail of foreign exchange facility within the limit prescribed under the Liberalized Remittance Scheme for the purposes mentioned above.

For persons other than individual

The following remittances by persons other than individuals shall require prior approval of RBI:

• Donations exceeding 1% of their foreign exchange earnings during the previous three financial years or USD 5000000 whichever is less for-

• Creation of Chairs in reputed educational institutes;
• Contribution to funds (not being an investment fund) promoted by educational institutes; and
• Contribution to a technical institution or body or association in the field of activity of the donor company.

• Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeding US$ 25000 or 5% of the inward remittances whichever is more;
• Remittances exceeding USD 10000000 per project for any consultancy services in respect of infrastructure projects and USD 10000000 per project for other consultancy services procured from outside  India;
• Remittances exceeding 5% of investment brought into India or USD 100000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

For the purpose the Act defines the term ‘person’ under Section 2(u) as including-

• An individual;
• A Hindu Undivided Family;
• A company;
• A firm;
• An association of persons or a body of individuals, whether incorporated or not;
• Every artificial juridical person, not falling within any of the preceding categories; and
• Any agency, office or branch owned or controlled by such person.

Rule 5 will not be applicable where the payment is made out of funds held in the Resident Foreign Currency (RFC) account of the remitter.  It is also not applicable to drawal made out of funds held in Exchange Earners’ Foreign Currency (EEFC) account of the remitter.   It is not applicable to the use of International Credit Card for making payment by a person towards meeting expenses while such person is on a visit outside India.