Import of Goods and Services under FEMA
Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000, Preamble of the FEMA reads as under:
An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India
FEMA provisions relating to import of goods and services are being reproduced below:
Section 2 (p) of FEMA defines import as under:
“import”, with its grammatical variations and cognate expressions, means bringing into India any goods or services;
Section 2(j) of FEMA defines current account transaction as under:
“current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes,—
(i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing abroad, and
(iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children;
Section 2e) of FEMA defines capital account transaction as under:
“capital account transaction” means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6;
From the above definitions of the FEMA, it is understood that the foreign trade including import of goods and services is a current account transaction.
To make payment against the import of goods and services, the importer is permitted in terms of provisions of Section 5 of FEMA to approach the AD bank for purchase of foreign exchange and make remittance for import to the non-resident supplier.
Section 5 of FEMA is as under:
5. Current account transactions
Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction:
Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.
In terms of Section 46 of FEMA, Central Government has the power to make rules:
46. Power to make rules
The Central Government may, by notification, make rules to carry out the provisions of this Act. Without prejudice to the generality of the foregoing power, such rules may provide for,—
(a)the imposition of reasonable restrictions on current account transactions under section 5;
(b) the manner in which the contravention may be compounded under sub-section (1) of section 15;
(c) the manner of holding an inquiry by the Adjudicating Authorities under sub-section (1) of section 16;
(d) the form of appeal and fee for filing such appeal under sections 17 and 19;
(e) the salary and allowances payable to and the other terms and conditions of service of the Chairperson and other Members of the Appellate Tribunal and the Special Director (Appeals) under section 23;
(f) the salaries and allowances and other conditions of service of the officers and employees of the Appellate Tribunal and the office of the Special Director (Appeals) under sub-section (3) of section 27;
(g) the additional matters in respect of which the Appellate Tribunal and the Special Director (Appeals) may exercise the powers of a civil court under clause (i) of sub-section (2) of section 28;
(h) the authority or person and the manner in which any document may be authenticated under clause (ii) of section 39; and
(i) any other matter which is required to be, or may be, prescribed.
In exercise of the powers conferred by Section 5 and sub-section (1) and clause (a) of sub-section (2) of Section 46 of the Foreign Exchange Management Act, 1999, and in consultation with the Reserve Bank, the Central Government has made Foreign Exchange Management (Current Account Transactions) Rules, 2000;
Import of Goods and Services into India is being allowed in terms of Section 5 of the Foreign Exchange Management Act 1999, read with Foreign Exchange Management (Current Account Transaction) Rules, 2000.
Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the FEMA. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents.
The directions issued on import of goods and services into India have been compiled in this Master Direction on Import of Goods and Services dated January 1, 2016 (Updated as on February 02, 2018).
Import trade is regulated by the Directorate General of Foreign Trade (DGFT) AD Category – I banks are required to ensure that the imports into India are in conformity with the Foreign Trade Policy in force and Foreign Exchange Management (Current Account Transactions) Rules, 2000 and the Directions issued by Reserve Bank under Foreign Exchange Management Act, 1999 from time to time.
AD Category I Banks can allow remittance for making payments for imports into India, after ensuring that all the requisite details are made available by the importer and the remittance is for bona fide trade transactions.
In terms of Section 10(6) of the Foreign Exchange Management Act, 1999 (FEMA), any person acquiring foreign exchange is permitted to use it either for the purpose mentioned in the declaration made by him to an Authorised Dealer Category – I bank under Section 10(5) of the Act or for any other purpose for which acquisition of foreign exchange is permissible under the said Act or Rules or Regulations framed there under.
Where foreign exchange acquired has been utilised for import of goods into India, the AD Category – I bank has to ensure that the importer furnishes evidence of import.
In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc.
AD Category – I banks can consider granting extension of time for settlement of import dues up to a period of six months at a time (maximum up to the period of three years) irrespective of the invoice value for delays on account of disputes about quantity or quality or non-fulfilment of terms of contract; financial difficulties and cases where importer has filed suit against the seller. In cases where sector specific guidelines have been issued by Reserve Bank of India for extension of time (i.e. rough, cut and polished diamonds), the same will be applicable.
While granting extension of time, AD Category –I banks are required to ensure that:
- The import transactions covered by the invoices are not under investigation by Directorate of Enforcement / Central Bureau of Investigation or other investigating agencies;
- While considering extension beyond one year from the date of remittance , the total outstanding of the importer does not exceed USD one million or 10 per cent of the average import remittances during the preceding two financial years, whichever is lower; and
- Where extension of time has been granted by the AD Category – I banks, the date up to which extension has been granted may be indicated in the ‘Remarks’ column in IDPMS.
- Cases not covered by the above instructions / beyond the above limits, may be referred by the AD bank to the concerned Regional Office of Reserve Bank of India.
RBI has also issued Operational Guidelines to the AD banks for matters relating to advance remittances for imports, Interest on Import Bills, Remittances against Replacement Imports, Guarantee for Replacement Import, Import of Equipment by Business Process Outsourcing (BPO) Companies for their overseas sites, Receipt of Import Bills/Documents by the Importer Directly from Overseas Suppliers, Evidence of Import, Import Data Processing and Monitoring System(IDPMS), Follow up for Import Evidence, Import of Gold, Import of Other Precious Metals, Import Factoring, Merchanting Trade, Import Payments through Online Payment Gateway Service Providers and Settlement of Import transactions in currencies not having a direct exchange rate.
Wherever the AD bank feels necessary; it may make a reference to the Reserve Bank seeking instructions in the case.
Compiled by Mr. G. D. Chugh
(Associate Partner in Factum Legal Advocates & Solicitors)