The foreign Exchange Management Act, 1999 (FEMA) has come into force from June 1, 2000. It deals with cross-border investment, foreign exchange transactions and transaction between resident and non-residents.
Compared to most other commercial laws, FEMA is one of the smallest laws having only 49 sections. FEMA extends to the whole of India. It also applies to all branches, offices and agencies outside India, which are owned or controlled by a person resident in India. In this respect, FEMA can be said to acquire extra-territorial jurisdiction.
It is important to note that RBI/GOI issues various Notifications, Directions, Press Notes, Guidance etc from time to time to administer FEMA. However, in case of conflict between any of them, the relevant FEMA notification will prevail.
Difference between both the law.
| Sr. No | Particulars | Income Tax Act, 1961 | Foreign Exchange Management Act, 1999 | |||||||||
| 1 | Applicable from | This was made applicable from 01st April, 1962. | It is applicable from 01st June, 2000. | |||||||||
| 2 | Coverage | It extends to whole of India including J&K. | It extends to whole of India including J&K. | |||||||||
| 3 | Objects | – The primary purpose of taxation is to raise revenue to meet huge public expenditure.
– Overall Economic Development is also the object of the tax law.
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– Utilisation of the Foreign Exchange Reserve of the country effectively.
– To facilitate external trade and payment – To promote the orderly development and maintenance of foreign exchange market. |
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| 4 | Content | It is divided into 49 Chapters consisting of section 1 to 298 and 14 Schedules. | It is divided into 7 Chapters consisting of section 1 to 49. | |||||||||
| 5 | Scope and Nature | This is a revenue law made for levy and collection of taxes. The income is determined for the full year. if a person is a resident, his global income is taxable in India. If a person is a Non-Resident, only his Indian income will be taxable. For earning income, no approval is required under the Income Tax Act. | This is a regulatory law. There are regulations for undertaking transactions. For example, if Non-Resident wants to keep deposits in bank accounts in India, he has to consider Deposits Regulations. Under these regulations, only NRIs can keep deposits in NRE/FCNR accounts. Or if an Indian resident wants to borrow from a bank in USA, he has to consider loan regulations. | |||||||||
| 6 | Harshness | Liberal provisions compared to FEMA | Stringent provisions compared to Income Tax Act, 1961. | |||||||||
| 7 | Controlling Authority | It is controlled through Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance. | It is regulated by the Reserve Bank of India and Rules relating to foreign exchange are framed by the Central Government in tune with the Foreign Trade policy of India. | |||||||||
| 8 | Chapters and Sections | This is divided into chapters and sections. | This is also divided into chapters and sections. | |||||||||
| 9 | Residential Status | Under the Income Tax Act, the residential status is for a full year. | Under FEMA, a person’s residence is from a particular date.
This is the fundamental difference between residential status as per IT and FEMA. |
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| 10 | How to decide Residential Status? | As per Section-6 of the Income Tax Act, 1961 | As per Note-1 | |||||||||
| 11 | Types of Residential Status | Under the Income Tax Act, a person can be a
(i) Resident (ii) Non-Resident (NR) (iii) Resident but not ordinarily Resident (RNOR) |
Under FEMA, a person can be a
(i) Person Resident in India (PRI) (ii) Person Resident outside India (PRO) (iii) Not Permanently Resident |
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| 12 | Sub Category of NR | As a Non-Resident, a person can be a
(i) Non-Resident Indian (NRI) (ii) Person of Indian Origin (PIO) (iv) Overseas Citizen of India (OCI) (v) Non-NRI/PIO/OCI (outright foreigner) |
As a PRO (Person Resident Outside India), a person can be a
(i) Non-Resident Indian (ii) Person of Indian Origin (PIO) (iii) Overseas citizen of India (OCI) (iv) Non-NRI/PIO/OCI (outright foreigner) |
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| 13 | Purpose of Stay | The meaning under the Income Tax Act is based on number of days stay in India. Purpose and Intention have almost no relevance. | Under FEMA, the purpose and intention of the stay in India is relevant. Number of days stay is only one of the factors which can help to determine the status. | |||||||||
| 14 | Example | A foreigner comes to India for tourism. He falls ill and he has to stay longer (more than 182 days), such a person will become a resident under the Act and his global income will be taxable in India. | The person has not come for undertaking employment or business in India, nor does it amount to a situation where his stay in India is uncertain. He will go back once he is better. Under FEMA, such a person will be a Person Resident Outside India (PRO). | |||||||||
| 15 | What the Act tries to govern? | It tries to govern:
– Income of the Resident in India as well as outside India – Income of the Non-Resident in India
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Note-1:
As per Section 2(v) of the FEMA Act,
(i) A person residing in India for more than 182 during the course of preceding financial year but does not include:
(A) A person who has gone out of India or who stays outside India, in either case:
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) A person who has come to or stays in India, in either case, otherwise than –
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
(ii) any person or body corporate registered or incorporated in India
(iii) an office, branch or agency in India owned or controlled by a person resident outside India (PRO)
(iv) an office or branch or agency outside India owned or controlled by a person resident in India (PRI)
As per Section 2(w) of the FEMA Act,
A “person resident outside India (PRO)” means a person who is not resident in India (PRI)
As per Section 2(u) of the FEMA Act, “person” includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by such person;
Comparative Chart of NRI/PIO/PIO Card Holder/OCI
| Sr. No. | Particulars | NRI (Non-Resident Indian) | PIO (Person of Indian Origin) | PIO Card Holders | OCI (Overseas Citizen of India) |
| 1 | Who | An Indian Citizen who is ordinarily residing outside India and holds Indian Passport | A person who or whose any of ancestors was an Indian National and who is presently holding another country’s citizenship/nationality i.e. he or she is holding foreign passport | A person registered as PIO card holder under MHA’s scheme vide Notification No. 26011/4/98-F.I. dated 19.08.2002. | A person registered as Overseas Citizen of India (OCI) under section 7A of the Citizenship Act, 1955. |
| 2 | Does he/she require visa for visiting India? | No | Yes, and of specific type depending on his/her purpose of visit. | Can visit India without visa for 15 years from the date of issue of PIO card. | Can visit India without visa for life long. |
| 3 | Is he/she require to register with local police authorities in India? | No | Yes | Yes, one time when the stay in India exceeds 180 days for the first time. | No |
| 4 | Which activities can be undertaken in India? | All activities | Activities as specified in the visa | All activities except moun-taineering, missionary, and research work and existing PAP/RAP which requires specific permit. | All activities except mou-ntaineering, missionary, and research work and existing PAP/RAP which requires specific permit. |
| 5 | How can one acquire Indian Citizenship? | He/she is an Indian citizen | As per section 5(1)(a) & 5(1)(c) of the Citizenship Act, he/she has to reside in India for minimum 7 years before making application for granting Indian citizenship. | As per section 5(1)(a) & 5(1)(c) of the Citizenship Act, he/she has to reside in India for minimum 7 years before making application for granting Indian citizenship. | Registered OCI may be granted Indian citizenship after 5 years from the date of registration provided, he/she stays for one year in India before making application. |
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