FEMA and International Taxation

Capital & Current Account Transactions

Capital Account Transaction means a transaction which:

Alters foreign assets and foreign liabilities (including contingent liabilities) of Indian residents.
Alters Indian assets and Indian liabilities of non-residents.
Is a specified transaction as mentioned in Section 6.

Essentially this is an economic definition and not an accounting or legal definition. It is intended to cover cross-border investments, cross-border loans and transfer of wealth across borders. RBI has been empowered to regulate capital account transactions. Unless the transaction is permitted as per regulations, Foreign Exchange (FX) cannot be drawn for the same.

Capital account transactions though liberalised to a great extent, continue to be regulated – by RBI in respect of transactions involving capital/debt instruments and by the Government of India in respect of other transactions. Unless permitted by way of notifications and rules or specific approvals, transactions on capital account cannot be undertaken.

Current Account Transaction means all transactions, which are not capital account transactions. Specifically, it includes:

Business transactions between residents and non-residents.
Short-term banking and credit facilities in the ordinary course of business.
Payments towards interest on loans and by way of income from investments.
Payment of expenses of parents, spouse or children living abroad or expenses on their foreign travel, medical and education.
Scholarships/Chairs, etc.

Primarily there are no restrictions on current account transactions. A person may sell or draw foreign exchange freely for his current account transactions, except in a few cases where limits have been prescribed (Section 5). The Central Government has the power to regulate current account transactions. Unless the transaction is restricted, FX can be drawn for the same.

Current Account Transactions: Unless the transaction falls within the below mentioned restrictions, FX can be drawn for the same without any limit.

Residents are permitted to remit up to US $ 250,000 for any current and capital account purpose (except those transactions which are prohibited altogether). See Table below for Current Account Transactions at a brief.

The details of restrictions on Current Account Transactions are as follows:

Payment / Withdrawal of FX which require prior approval of RBI	Transactions which are prohibited
Release of exchange exceeding the limits under LRS (presently US $ 250,000) in one financial year, for one or more private visits to any country (except Nepal and Bhutan).	Drawal of forex for travel to Nepal & Bhutan
Exchange facilities exceeding the limits under LRS for persons going abroad for employment.	Transactions with person resident in Nepal & Bhutan
Exchange facilities for emigration exceeding the limits mentioned under LRS or the amount prescribed by country of emigration.	Remittance out of lottery winnings
Release of foreign exchange, exceeding the limits under LRS to a person, irrespective of period of stay, for business travel/ attending a Conference/specialised training/ maintenance expenses of a patient going abroad for medical treatment / check-up abroad/ for accompanying as attendant to a patient going abroad for medical treatment/ check-up.	Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value on exports of tea and tobacco.
Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/doctor abroad. However, an amount up to the limits under LRS or its equivalent can be released without insisting on any estimate from a hospital/doctor.	Remittance for purchase of lottery tickets, banned / prescribed magazines, football pools, sweepstakes, etc.
Remittance for maintenance of close relatives abroad, Exceeding the net salary (after deduction of taxes, contributions and other deductions) of a person who is resident but not permanently resident in India and (a) is a citizen of a foreign state other than Pakistan or (b) is a citizen of India who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign company. Exceeding US $ 250,000 per financial year per recipient.	Payment of commission on exports made towards equity investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies.
Release of exchange for studies abroad exceeding the estimates from the institution abroad or the limits under LRS per academic year, whichever is higher.	Remittance of income from racing / riding or any other hobby
Remittances exceeding US $ 1million per project, for any consultancy services procured from outside India.	Remittance of interest income on funds held in NRSR Scheme Account.
Remittances exceeding US $ 10 million per project, consultancy services procured from outside India by Indian companies executing infrastructure projects.	Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
Commission to agents abroad for sale of residential flats/commercial plots in India, exceeding US $ 25,000 or 5% of the inward remittance (whichever is higher) per transaction.	Payment related to “Call Back Services” of telephones.
Donations by Indian corporates, exceeding 1% of the foreign exchange earnings during the previous 3 financial years or US $ 5 million, whichever is less, for creation of Chairs in reputed educational institutes or donations to funds (not being an investment fund) promoted by educational institutes or donation to technical institution or body or association in the field of activity of the donor Company.
Remittance exceeding US $ 100,000 or 5% of the investment brought into India, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses in India

The following payments will require prior approval from the Government of India, except where the payment is made from the RFC or RFC(D) or EEFC Account of the remitter: -

	Purpose of Remittance	Approval to be obtained from
1.	Cultural Tours	Ministry of HRD (Department of Education and Culture)
2.	Advertisement in foreign print media for the purpose other than promotion of tourism, foreign investments and international bidding (exceeding US $ 10,000) by a State Government or its PSU	Ministry of Finance (Department of Economic Affairs)
3.	Remittance of freight of vessel chartered by a PSU	Ministry of Surface Transport (Chartering Wing)
4.	Payment of import through ocean transport by a Government Department or a PSU on CIF basis	Ministry of Surface Transport (Chartering Wing)
5.	Multi-modal transport operators making remittance to their agents abroad	Registration certificate from the Director General of Shipping
6.	Remittance of hiring charges of Transponders (a) TV channels (b) Internet service providers	Ministry of Information and Broadcasting Ministry of Communication and Information Technology
7.	Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping	Ministry of Surface Transport (Director General of Shipping)
8.	Remittance of prize money/sponsorship of sports activity abroad by a person other than International/National/ State Level Sports bodies, if the amount involved exceeds US $ 100,000	Ministry of HRD (Department of Youth Affairs & Sports)
9.	Remittance for membership of P&I Club	Ministry of Finance (Insurance Division)