liberalised remittance scheme - issues and controversies

Liberalised Remittance Scheme - Issues and Controversies

BCAS Lecture MeetingMumbai13th November 2019

CA Rutvik Sanghvi

Liberalised Remittance Scheme – Issues and Controversies

CA Rutvik Sanghvi 2

Sr. No. Particulars

1 Overview

2 Liberalised Remittance Scheme

3 LRS for Immovable Property Outside India

4 LRS-ODI by Resident Individuals

5 LRS for Emigration

6 LRS for Other Remittances

7 LRS – Other important points to note

8 Practical & Tax Issues

Overview

FEMA – A Policy Law

FEMA is a policy law

Drafted loosely

Compounded by change in position later in timePrinciples keep changing as individuals keep changing

No Institutional Memory

Multiple notifications and rules can apply to a particular transaction

Inconsistencies between Govt and RBI

Recourse to appellate options limited

CA Rutvik Sanghvi Slide No. 4

What cannot be done directly, cannot be done indirectly

Compliance with FEMA a must

FEMA is now more draconian than FERA

Seizure of assets in IndiaSection 37A newly introduced vide Finance Act, 2015 in FEMA

Provides that if any person holds any foreign exchange, foreign security or any immovable property outside India in contravention of Section 4 of FEMA, the equivalent value of property in India can be seized

No opportunity is to be given to prove that the accused is actually innocent before seizure, only later

Exemption for assets under value of Rs. 1 crore

Can lead to penalty and prosecution

CA Rutvik Sanghvi 5

Liberalised Remittance Scheme

Liberalised Remittance Scheme

LRS brought in as a relief to all Indian Residents to remit money outside India

Brought in partial capital account convertibility by allowing specified capital account transactions up to the LRS limit

Available to all Resident Individuals including minors

Up to USD 250,000 per financial year can be remitted

Introduced on February 4, 2004, with a limit of USD 25,000

Limit has increased over the years but reduced in between due to forex reserve position

All earlier facilities for release of exchange or for remittances for current account transactions under Para 1 of Schedule III are subsumed under the overall limit of USD 250,000 – no separate limits for gifts, donations, etc.

7CA Rutvik Sanghvi

LRS Limit over the years

CA Rutvik Sanghvi 8

25000

50000

100000

200000

75000

125000

250000

25000 50000 100000 200000 75000 125000 250000

Feb-04 Dec-06 May-07 Sep-07 Aug-13 Jun-14 May-15

Lim

it i

n U

SD

Date

Remittances under LRS over the years

CA Rutvik Sanghvi 9

10 25 73441

808 983 1164 1002 1206 1094 1326

4643

8171

11334

13788

0

2000

4000

6000

8000

10000

12000

14000

16000

04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19

In U

SD

Mil

lio

ns

Financial Year

How it operates

Section 4 of FEMA: Blanket prohibition: No person resident in India shall acquire, hold, own, possess or

transfer any foreign exchange, foreign security or any immovable property situatedoutside India

Section 5 of FEMA: 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 Central Government may, in public interest and in consultation with RBI, impose

such reasonable restrictions for current account transactions as may be prescribed

FEM(Current Account Transaction) Rules, 2000

Section 6 of FEMA: Section 6(1) - Any person may sell or draw forex for a capital account transaction

subject to Sections 6(2) and 6(3) gave powers to RBI to prescribe, regulate, prohibit or restrict

transactions Section 6(3) deleted post Finance Act 2015 Notifications now issued by Government First such notification issued in 2019 – RBI regulating in legal vacuum between 2015 and 2019

Legislated by Ministry of Finance, Regulated by RBI & Enforced by ED

CA Rutvik Sanghvi 10

Difference between Current and Capital Account Transactions

Capital Account transaction means a transaction which alters Assets or liabilities including contingent liabilities outside India for

persons resident in India Assets of liabilities in India of persons resident outside India

Transactions other than Capital Account transactions are Current Account Transactions

Current Account transactions freely allowed unless restrictedCapital Account transactions prohibited unless specifically

allowed

Distinction to be viewed from the perspective of India’s Current Account position Accounting terminology not to be used

Not exactly classified as revenue and capital in nature

Will the transaction have a lasting impact on India’s foreign assets and liabilities position internationally or get squared off?


Difference between Current and Capital Account Transactions

Current Account

• Machinery imported by Resident on normal credit terms

• Payment of Guarantee Fee to non-resident

• House rental payments

• Gold imported into India

• Interest payments

Capital Account

• Machinery imported on instalment basis or EMI

• Guarantee provided by a Resident outside India

• Purchase of foreign Immovable property

• Gold purchased and kept in locker abroad

• Loans taken abroad


Illustrations:

Pre-LRS position

Current Account Transactions (CAT) Rules under Schedule I prohibited and Schedule II allowed only with prior approval of Government

Current Account Transactions under Schedule III allowed only with Government Permission

Other than above transactions, no restriction or limit on any Current Account Transaction

CAT Rules sought to provide restrictions on only certain transactions

All Capital Account transactions restricted

Allowed only as specified under Notifications issued by RBI under Section 6 of FEMA, now by Government directly

LRS sought to provide relief from these restrictions up to LRS Limit

Both restrictions on Current Account Transactions and relief for Capital Account Transactions covered under LRS Leads to confusion


Liberalised Remittance Scheme – Flip Flop Policy

LRS when introduced was with clear objective to allow Resident Individuals to remit funds within LRS limit for “any purpose”:

For any Current Account Transaction; or

For any Capital Account Transaction; or

For a combination of both!

Funds up to the limit would be partial capital account convertibilityCan be used to purchase any asset outside India without approval of RBI

Limit of LRS was in addition to limit under Schedule III



Famous Quotes:

RBI Deputy Governor: “We are flush with funds. Use LRS for any purpose – you can as well throw the remitted funds from the Alps.” In 2004 forex reserves were around USD 100 Billion

RBI Governor Dr. Y V Reddy in his book “Advice & Dissent” quotes Mr. Jaswant Singh, then FM:

“Go and conquer the world, we will be your supporters.”

“This is a no-questions asked window and was in addition to all the existing facilities.”

The oppressive forex regime that had haunted individuals in India since 1957 was put to an end on 19 February 2004”



Drastic change in position brought in from May 2007

LRS can be used to remit for any ‘permissible’ current or capital account transaction or a combination of both No guidance on what is ‘permissible’ transaction in 2007

Paradoxical situation as LRS was introduced to allow transactions which required prior approval!

Permissible capital account transactions under LRS specified only in 2015 as: Opening of foreign currency account abroad with a bank;

Purchase of property abroad;

Making investments abroad;

Setting up Wholly owned subsidiaries and Joint Ventures abroad;

Extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.


Liberalised Remittance Scheme - Prohibitions

Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “noncooperative countries and territories”, from time to time.North Korea and Iran

For remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism

For remittance from India for margins or margin calls to overseas exchanges / overseas counterparty

Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.

Remittance for trading in foreign exchange abroad


LRS for Immovable Property outside India

Immovable Property Outside India - LRS

Resident individual can send remittances under the Liberalised Remittance Scheme for purchasing IP outside India

Such IP can be:Leased

Sold

Funds from lease and sale can be retained outside India

Funds retained can be reinvested

Multiple LRS remittances can be clubbed for purchase ofhigh value IPOne individual can remit USD 250,000 in foreign bank account over

multiple years until sufficient funds are collected


Case Study 1 – Investment in immovable property abroad under LRS

Facts:

Adani Family intends to purchase immovable property in UAE

Property investment is of USD 1 Million

Issues:

Can multiple family members invest together?


UAE

India

House Property

Adani Family

Adani Family

Adani Family

Adani Family


Adani Family can jointly purchase property – 4 family members can remit funds of USD 250,000 to invest 1M USDProperty has to be in joint

name

Ownership needs to be in proportion to investment made

Family Members covered

No definition for family members


UAE

India

House Property

Adani Family

Adani Family

Adani Family

Adani Family


Facts:

Mr. Ambani intends to purchase immovable property in UAE

Property investment is of USD 1 Million

Issues:

Can property be purchased on instalment basis?

Can property be purchased under EMI or mortgage loan?


UAE

India

House Property

Mr. Ambani


Instalments:Financial commitment

cannot be over and above LRS limit

Even AP Circular 32 dated 4.9.2013 allowed payment in instalments within LRS only for pre-existing contracts as of 14.8.2013 No such relaxation now

Loans:Remittance under LRS

cannot be out of borrowed funds in India

Individuals cannot enter into a loan agreement overseas


UAE

India

House Property

Mr. Ambani

Case Study 3 – Investment in immovable property abroad under LRS through company

Facts:

Mr. A, Mr. B and Mr. C incorporate a Co. in UAE through LRS

ABC Co. purchases immovable property in UAE

Issues:

Can property be purchased through company under LRS?


UAE

India

House Property

Mr. BMr. A Mr. C

ABC Co.

Case Study 3 – Investment in immovable property abroad under LRS through company

Topsy-turvy history Investment in Company allowed freely

under LRS when it was introduced LRS limit could be used for any current or

capital account transaction However, RBI changed its view Investment after 5.8.2013 was not

permitted in a Company which does nothave operating business

Investment before that was also subject to compounding. RBI has taken an adverse view and advises to:

Wind up, bring back proceeds and go forcompounding.

This is because even today, holding IPthrough a foreign entity is not permitted.

If investment was before 8.5.2007, whenword “permissible” was inserted, RBImay permit to hold?

However, even prior to 5.8.2013, debt by foreign co. was not permitted.


UAE

India

House Property

Mr. BMr. A Mr. C

ABC Co.

Immovable Property Outside India - LRS

Points to note:

Remittance to non-cooperative countries listed by FATF not allowed under LRS

LRS limits can be lowered by RBI – has been done before

A Resident can acquire property purchased through LRS by inheritance or giftCan retain such IP abroad from 21.1.2016 as per Notf. 7(R), Reg.

5(2)

However, on sale of such property, funds will have to be brought back to India

Incomes earned on such property will also have to be brought back to India


LRS-ODI by Resident Individuals

Overseas Investment Routes

28

Overseas Investments

Resident Individuals

LRS-ODI For Overseas

Business

PortfolioFor Overseas Investment

Indian Company, LLP, Firm

Direct Investment

Automatic

Approval

Other investment

Branch overseas

CA Rutvik Sanghvi

LRS-ODI by Resident Individuals

Resident Individuals allowed to invest in shares – both listed and unlisted since 2004

Suddenly FAQs of 17th September 2010 stated for first time that LRS cannot be used to setup company abroadPoint (v) in reply to Q. 3 of the FAQ

FAQ is not law

Master Circulars of 2011 and 2012 still stated that investment can be made in shares (listed or otherwise)

RBI issued notification to allow JV/WOS outside India under LRS-ODI from 5th August 2013 Incomplete resolution of arbitrary change in LRS Scheme

Notification No. FEMA. 263/RB-2013


LRS-ODI by Resident Individuals – Restrictions

Investment limited to LRS limit - USD 2,50,000 per Financial Year Includes investment from balances in EEFC and RFC Accounts

Investment can be made singly or in association with other Resident Individuals or with Indian Party

Only for bonafide business outside India

Prohibited to invest in a JV / WOS which is engaged in Real estate business; or

Banking business; or

Financial services activity

Investment only in equity or compulsorily convertible preference shares



Investment only in operating entity

Hence, no step-down subsidiary is allowed Effectively no SPV can be created

No guarantees allowed

No pledge of shares allowed

No non-cash remittances allowed

Charge on domestic or foreign assets not allowed

Write-offs not allowed

Investment needs to be through banking route Use of credit cards or cash withdrawals to open companies outside

a violation of FEMA

Gifting of shares by relatives or non-relatives may not strictly fall within RBI intent – better to go through LRS-ODI RouteWhat cannot be done directly, cannot be done indirectly



Valuation to be done as prescribed

Cannot invest in countries identified as “non-cooperative countries and territories” by FATFNorth Korea & Iran

Resident individual should not be on Reserve Bank's Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation/enforcement agency or regulatory body


LRS-ODI by Resident Individuals – Reporting & Disinvestment

Duly completed Part I of the Form ODI to be filed within 30 days of remittance

APR Form to be filed annually FLA not required

Alteration in shareholding pattern to be reported within 30 days

Disinvestment allowed only after one year from the date of first remittance

Disinvestment proceeds to be repatriated to India immediately and in any case not later than 60 days

No write off shall be allowed Disinvestment may be reported by the designated AD to the Reserve

Bank in Part IV of Form ODI within 30 days of receipt of proceeds

What happens in case of change of residence? No clarity in law Technically investment covered under FEMA, thought investor is not


Case study 4 – JV vs. Portfolio investment

Facts:

Indian Resident, Mr. A, proposes to invest in PQR Inc., USA

Mr. A intends to acquire 5% stake in PQR Inc.

Issues:

Is Mr. A’s investment under ODI Route?

34

USA

India

PQR Inc.

Mr. A

XYZ Inc.

5%

95%

CA Rutvik Sanghvi

Case study 4 – JV vs. Portfolio investment

Decision depends on intention and conduct of Indian Party

ODI is with objective of establishing a lasting interest in the overseas entity

ODI entails significant degree of influence in the management of JV/WOS

35

USA

India

PQR Inc.

Mr. A

XYZ Inc.

5%

95%

CA Rutvik Sanghvi

Case Study 5 – Investment Business

Facts:

Mr. S proposes to invest in T Inc., USA

T Inc. will invest in various listed securities in USA

No funds will be invited from outsiders, either by Mr. S or T Inc.

Issues:

Is Mr. S’s investment allowed under ODI Route?

36

USA

India

T Inc.

Mr. S

<1%

Shares of Listed Cos.

CA Rutvik Sanghvi

Case Study 5 – Investment Business

Issues:

Financial Services Sector not defined under Notfn. 120

Mr. S is undertaking NBFC activityCannot be done except by

an NBFC

Even if done by an NBFC, T Inc. needs to comply with Regn. 7

37

USA

India

T Inc.

Mr. S

<1%

Shares of Listed Cos.

CA Rutvik Sanghvi

Investment in Financial Services Sector

Regn. 7: Indian Party (IP) can make investment in JV/WOS in Financial Services Sector only if:

It is registered with regulatory authority in India for conducting financial services (FS) activities

It has obtained prior approval from regulators in India and abroad

It has earned net profit during the last 3 FYs

It has fulfilled prudential norms for capital adequacy as prescribed by the regulatory authorities

Regulation applies even to JV/WOS and its step-down subsidiary

Investment or Financial activities may lead to FS regulations

Regulator’s (RBI-NBD, SEBI, IRDA, etc.) permission may be required before opening up of overseas entity

“Financial Services Sector” not defined under ODI

Banks following MD on Financial Services provided by Banks

Investment in Securities covered under definition of Financial Services38CA Rutvik Sanghvi

Case Study 6 - Round Tripping

Round Tripping not defined -refers to overseas investment by Indian resident which results in investment back into India

Can be in various forms:By sending funds abroad which

are used to invest back in India

Indian Resident controlling or owning JV/WOS which invests in India

Harmful practice if undertaken to evade tax


Outside India

India

PQR Inc.

B Co.Indian

Resident

Round Tripping

Nothing stated in FEMA prohibiting Round Tripping

However, not allowed in practice without prior RBI ApprovalReason provided – not “bonafide business”

Approval provided by RBI in genuine cases for commercial and / or business reasonsTax not considered as commercial reason

Joint Venture with foreign partner in business requiring Round tripped structure can get an approval

Other laws:GAAR provisions under Income-tax Act, 1961 provide that an

arrangement shall be deemed to lack commercial substance if it involves round trip financing

Revised SEBI Guidelines for Offshore Derivative Instruments make stringent rules for Offshore Derivative InstrumentsCA Rutvik Sanghvi 40

LRS for Emigration

Case Study 8 - Emigrating individuals


India

Outside India

Mr. Modi wants to settle in USA using a US EB5 VISA.

Issues:Obligations of US EB5 VISA

Remittance under LRS

Where can the remittance be used?

Analysis of Case Study 8 – Emigrating Individuals

General LRS for $250,000 available only for incidental expenses for

emigration, not for investment under Visa Programme

Master Direction 7 – Liberalised Remittance Scheme – Regulation 7(d)

Person going on an US EB5 Visa

Needs to make investment in local company in USA to do local business which

employs a minimum of 10 employees; or

Invest in units of a Regional Center which in turn invests in permitted

businesses

Minimum investment required of $ 500,000 ($900,000 from 21.11.2019)

Individual allowed to remit only $ 250,000 under LRS

Joint investment made with family members needs to be in joint names

Letters issued by Regional Center in both names, while investment is recorded

in individual name!

For incorporating a new Co., need to send funds under LRS-ODI

Real Estate business not allowed under ODI Route


Analysis of Case Study 8 – Emigrating Individuals

Things to take care:

Not an easy route, many cases of rejections

Watch out for changes in regulations

Thorough check of Agents required

Beware of frauds in USA


LRS for Other Remittances

LRS - Other “Current” Account Remittances

LRS specifies “permissible” current account transactions (i) Private visits to any country (except Nepal and Bhutan).

(ii) Gift or donation.

(iii) Going abroad for employment.

(v) Maintenance of close relatives abroad.

(vi) Travel for business or attending a conference or specialised 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.

(vii) Expenses in connection with medical treatment abroad.

(viii) Studies abroad.

(ix) Any other current account transaction

Other current account transactions not allowed??

Import payments??


LRS - Other “Current” Account Remittances

Prior Approval needed from RBI for remittance beyond LRS limit for specified current account transactions

Possible if circumstances warrant need for enhanced remittance

Approval not required for Emigration, Medical Treatment and Studies abroad

Can be supported by self-declaration

Banks might ask for more documentation

Limits for Gifts and Donations subsumed under LRS limit

Gift of funds by one resident to another resident outside India not allowed

Any gift made to a resident outside India needs to be brought back to India

Shares allowed to be retained abroad

Intention is to cover portfolio shares


LRS - Other “Capital” Account Transactions

Opening of foreign currency account abroad with a bank;

Making investments abroad- acquisition and holding shares of both listed and unlisted overseas company or debt instruments;

Acquisition of qualification shares of an overseas company for holding the post of Director;

Acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration;

Investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;

Extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.


LRS - Other “Capital” Account Transactions

Capital Account transaction India other than those specifically permitted not allowed: Asset purchase outside India unless brought into India

Gold

Art

Long-term lease tantamount to purchase of asset also covered

Guarantees


LRS – Other important points to note

Remittance of Assets and incomes thereon

Can assets be kept outside India? Yes

What about inheritance of LRS assets?

Immovable property purchased under LRS need not be brought back on inheritance

What about change of residence of remitter from R to NR?

Does income have to be remitted back to India? Income and sum remitted need not be brought back into India

and can be reinvested overseas

Income from inherited LRS assets to be brought back into India


Remittance for Current Account Transactions - Exemptions

Use of International Credit Cards Payments made through ICC without any limits by RBI Only limit would be the credit limit available against the card Exemption pre-dates even LRS

AP (DIR Series) Circular No.53 dated June 27 2002; and RBI Press Release dated January 30 2003.

ICC can be from card issuers in India ICC can be used for payments on internet

Debit and ATM Cards can also be used for any purpose for which foreign exchange drawals can be made

EEFC account & RFC account In general transactions under Schedules II & III can be made

without prior approvals by remitted out of funds held in these accounts


LRS – For Entities Other than Individuals

Entities other than individuals covered under LRS?4th Proviso to sub-rule 1 of Schedule III to CAT Rules states that

a person other than individual can also avail of LRS

Conflict with sub-rule 2 which mandates prior RBI approval for persons other than individuals for

Certain Donations exceeding specified limits

Commission to Agents abroad exceeding specified limits

Remittances for certain consultancy projects exceeding specified limits

Reimbursement of Pre-incorporation expenses

Goes against general understanding that there is no limit on Current Account Transactions for entities other than Individuals

Unnecessary “relaxation” leading to restriction


LRS - Compounding

LRS violations can be compounded with RBI Only route to avoid enforcement by ED

Compounding means you are seeking forgiveness

Violations would need to be regularized before they can be compounded Regularisation can be in the form of filing of forms if investment or

transaction is allowed under FEMA at presentFees should be token and violations are technical in nature

Can be compounded even if transaction was not permissible earlier

Regularisation can be in form of “cease & desist” resulting in winding up of structure or sale of investment in cases where transaction is not permissible under FEMAFee can consider actual gains

At the discretion of the Officer

Intention and severity can be determining factors


Practical and Tax Issues

Practical Issues

Jurisdictional analysis from non-tax perspective:

Automatic issue of Capital without remittance

Hidden Costs

Lack of proper Accounts and Audit

Judicial strength

Political and Economic risks

Tax Havens under scanner – presumption of guilt

Substance Requirements and BEPS/MLI impact

Foreign laws to be adhered to

Succession Planning


Tax Issues

POEM

Transfer Pricing

Permanent Establishment in case of Overseas Branch

Foreign Tax Credits

Disclosure in Income-tax Return forms

Automatic Exchange of Information

Valuation under sections 56(2)(viia) / 56(2)(x) and 56(2)(viib)

GAAR


Outbound Structuring from Tax perspective


Sr. No.

Particulars Company Firm / LLP Individual

1 On receipt of dividend by Indian Party / Resident Individual

15% (Sec. 115BBD)

30%(Sec. 56)

30% (Sec. 56)

2On distribution to shareholders/ partners

Nil (Deduction u/s.

Sec. 115-O)

Nil(Exempt

u/s. 10(2A))NA

3Effective tax rate in hands of promoter/ owner

15% 30% 30%

Benefit of 15% ETR under Co. Route available only if

investment in JV/WOS is more than 50%

Foreign Assets Disclosure

Mandated as part of Income-tax Forms from AY 2012-13

Schedule FA covers:Depository Accounts from FY 2018-19

Custodial Accounts from FY 2018-19

Foreign Equity & Debt Interest in any entity from FY 2018-19

Foreign Cash Value Insurance or Annuity Contract from FY 2018-19

Financial Interest in any Entity

Immovable Property

Any other Capital Asset

Accounts with Signing Authority

Trusts

Any other “income” derived from source outside India not included above and income under the head business or profession


Consequences of non-disclosure under FEMA

No requirements for disclosure under FEMA If investment is in line with FEMA, no consequences even if not

disclosed under Income-tax

If investment made violating FEMA, stringent consequences

FEMA is now more draconian than FERA for foreign assetsProsecution which was absent from FEMA earlier now part of it

again

Seizure of equivalent assets in IndiaSection 37A introduced vide Finance Act, 2015 in FEMA

Already applied by ED in a few cases to seize assets in India

Can lead to penalty and prosecution

Consequences under Black Money Act primary and substantial


Thank You!

Questions?

Acknowledgements: CA Rashmin Sanghvi & CA Naresh Ajwani

[email protected]

www.rashminsanghvi.com

61

mailto:[email protected]

http://www.rashminsanghvi.com/

liberalised remittance scheme - issues and controversies

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