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Current account transactions [Section 5 of FEMA Act, 1999] - FEMA Ready Reckoner - FEMAExtract Current account transactions Read section 5, of FEMA Act, 1999 read with Rules of Foreign Exchange Management (Current Account Transaction) Rules 2000 As per section 5 , Any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. 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. The term of Current Account Transaction is define negatively in section 2(j) of the this Act. Current Account Transaction means 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 General rule to be understood is that Current Account Transaction are freely permitted unless specifically prohibited p r o h i b i t e d u n l e s s s p e c i f i c a l l y o r generally permitted. The central government may, in public interest and in consultation with the reserve bank , impose such reasonable restriction for current account transaction as prescribed under foreign Exchange Management (Current Account Transactions)Rules, 2000. Sectio n 5 of the Act permits any person to sell or draw Foreign Exchange to or from an Authorised person to undertake any current account transaction. The Central Government has the power to impose reasonable restrictions, in consultation with the RBI and in public interest on current account transactions. The Central Government has in exercise of this power issued the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Example 1. An Indian resident imports machinery from a vendor in Japan for installing in his factory. Under accounting and income-tax law, machinery is a capital expenditure . Under FEMA Act. 1999, it does not alter (create) an asset in India for the Japan vendor. It does not create any liability to a Japan vendor for the Indian importer. Once the payment is made, the Indian resident or the Japan vendor neither owns nor is owed anything in the other country. Hence it is a Current Account Transaction . Example 2. An Indian resident imports machinery from a vendor in Netherland for installing in his factory on a credit period of 3 months. Under accounting and income-tax law, for the credit period of 3 months, there is a liability of the Indian importer to the Netherland vendor. Under FEMA Act. 1999 also, it is a liability outside India. As per Section 2(j)(i) , short-term banking and credit facilities in the ordinary course of business are considered as a Current Account Transaction. Hence import of machinery on credit terms is Current Account Transaction . Wh a t i f the credit period is 12 months? Under Master Directions for imports, payment has to be made within 6 months. If the credit period is in excess of 6 months, then it is a loan. There are separate rules for loan. If the transaction falls within the loan rules, then it is permitted. Short term loan by and large means for 6 months. For exports, the period for realisation of proceeds, is 9 months. Example 3. A Person Resident in India transfers US$ 1,000 to his NRI brother in New York as gift . The funds are sent from the Person Resident in India (PRII) Indian bank account to the NRI brother s bank account in New York. Under accounting and income-tax law , gift is a capital receipt . Under FEMA, once the gift is accepted by the NRI, no one owns or owes anything to anyone in India or USA. The transaction is over. Hence it is a Current Account Transaction . If gift is a current account transaction, why is there a restriction under Current Account regulations? It is because while there is no restriction on Current Account transactions, some reasonable r e st ri c t i o n s c a n be imposed. Otherwise people may transfer funds abroad under the garb of current account transactions. I f the Person resident in India gives a Person resident outside India a gift in India in Indian currency. For the Person resident outside India (PROI), it will result in funds lying in India (alteration of Indian asset). For Person Resident in India (PRII) , there is no creation of asset or a liability. As this transaction creates an asset in India for the Person Resident in India (PROI) , it is a Capital Account transaction . (Under separate rules, giving a gift in India to an NRI is permitted subject to certain rules) I n a similar manner, if a PROI gives a gift to an PRII by remitting funds in India, there is no restriction. However, if the PROI gives the funds abroad, the resident cannot keep it abroad. He has to bring it to India. A n y person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction.
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