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FEMA Prohibited Current Account Transaction

sssvkSridharan R. (CA (Final) Salem. Tamilnadu. sssvksridhar@yahoo.co.in) (218 Points)

18 May 2011

Dear CA Club India members,

Reg.: Foreign Exchange Management Act, 2000.

As per Rule 3 of the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2001, a person CAN NOT draw foreign exchange for any of the transactions specified in the Schedule I, one of which is

“Payment of commission on exports made towards equity investment in joint ventures/wholly owned subsidiaries abroad of Indian companies.”

Can any of you explain the above transaction with example, please…..

Regards,

Sridharan R.

Salem.

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2 Replies

CA. Anuj Gupta (Practices in NRI Int.Tax FEMA TP FDI/FIPB & FCRA) (7024 Points)
Replied 24 May 2011

Thats pretty simple. Indian companies are allowed to made equity investments in foreign subsidiary /JV by sale of goods and no commission can be paid on the same.

For ex. A ltd. an Indian Company wishes to take equity in B Ltd.(UK). Now instead of sending money as equity A Ltd. (manufacturer of machines)sends the machines and books the following entry:-

Investment in Share Capital of B Ltd. Dr. .................

To Sales Cr. ..................

(Being exports sales vide invoice no.XXXX made in lieu of equity participation in B Ltd.)

FEMA doesn't allow any commission to be paid against such export sales.

Hope the matter is clear.

Anuj

0-981016211

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sssvkSridharan R. (CA (Final) Salem. Tamilnadu. sssvksridhar@yahoo.co.in) (218 Points)
Replied 25 May 2011

Dear CAClubIndia Member,

Eventually CA. Anuj Gupta has helped me to interpret the above transaction.

He wrote to me at my personal mail ID the following clarification.

“The answer to your query is pretty simple. Indian companies are allowed to made equity investments in foreign subsidiary /JV through sale of goods and no commission can be paid on the same.

For example, A ltd. an Indian Company wishes to take equity in B Ltd (UK). Now instead of sending money as equity, A Ltd. (manufacturer of machines) sends the machines and books the following entry:

Share Capital of B Ltd. Dr. .................

To Sales Cr. ..................

(Being exports sales vide invoice no. XXXX made in lieu of equity participation in B Ltd.)

FEMA doesn't allow any commission to be paid against such export sales.

Hope the matter is clear.”

About CA. Anuj Gupta:

He is a practicing Chartered Accountant, Company Secretary and has also completed his DISA. He is a member of the research group of NIRC and the joint secretary of Delhi Chapter of The Chamber of Tax Consultants.

To know more about him, click the link below.

/profile.asp?member_id=20495