FEMA - An Overview from the

perspective of Internationaltax
Hitesh D. Gajaria
02 May 2023
Index

Introduction
Foreign
Glossary
Direct
investment

Liaison /Branch / Export of

Project Offices Goods &
Services

Overseas Import of
Direct Goods &
Investment External Services
Commercial
Borrowings

2
Introduction
 FEMA – Legal Framework
• FEMA1999 • Researching on any subject :
- Replaced the draconian Foreign Exchange Regulation Act 1973; with appointed date 1
- Sections of FEMA 1999
June 2000
- Main RBI Regulations / Notifications
• Aims ofFEMA
- RBI’s A.P.DIR Circulars issued
- Facilitate external trade and payments
from time to time
- Promotion of foreign exchange markets
• FEMA Rules /Regulations - RBI Master Direction (updated
from time to time)
- Rules notified by the Central Government and
- RBI Master Circulars issued earlier
- Regulations notified by the RBI
- RBI FAQs (updated from time to
- Consultation between Government andRBI
time)
• RBI website : www.rbi.org.in
- Press Notes issued by Government
- A P (Dir Series) - issued from time to time (especially cases of FDI) – Press
- Master Directions – updated now periodically Notes are not statute
- FAQs
- Other items – News articles, RBI
• Every Transaction either Current (generally permissible unless prohibited) or Capital Account
lectures, clarification to AD-
(only if andas permitted)
Banks, etc.
• Several powers /responsibilities delegated to the AD Bank by RBI – their role / concurrence is
critical but its primary responsibility is ofconstituents, with role in compliance & monitoring

4
Foreign Direct Investment
 FDI -Basics
Statutory Framework
• Foreign Exchange Management (Non-debt
Instruments) Rules, 2019 issued by Central
Government as amended from time to time,
read with schedules
• FDI Policy updated from time to time
• Foreign Exchange Management (Mode of
Payment and Reporting of Non-Debt
Instruments) Regulations, 2019 - Reporting
requirement issued by the RBI
• Master Direction on FDI by RBI
Foreign Portfolio Investment (FPI)
• Fresh investment below 10% of paid-up equity
capital in Listed Indian Company would be
covered as FPI
• If shareholding increases beyond 10%, total
foreign investment shall be reclassified asFDI
Foreign Direct Investment (FDI) refersto
• Investment through equity instruments in
Unlisted Indiancompany
• Investment through equity instruments in
Listed Indian Company of 10% or more of
paid-up equity capital on fully dilutedbasis
• Existing Investment in equity instrument of
Listed Indian company falling below 10% of
paid-up equity capital on fully diluted basis
continues to remain FDI
Mode of funding
• Inward remittance through banking
channel into Indian Company,
• NRE/ FCNR/ NRO account for NRIs / OCI
• SNRR (For FVCIs and Foreign Portfolio
Investors)
• Issue of warrants- subject to conditions
• Partly paid-up shares – subject to
conditions
6
 New Classification – post 17 October 2019
Instruments

Regulated by Ministry of
Regulated by RBI Debt Non-Debt Finance, Department of
Economic Affairs

• Bank loans, floating/ fixed rate notes /

Foreign Exchange debentures (other than CCD and Foreign Exchange Management
Management (Debt CCPS) (Non-debt Instruments) Rules,
Instruments) Regulations • Govt bonds 2019 [Notification dated 17
2019 • Corporate Bonds October 2019]
• DRs with underlying debt securities
 All investments in Equity instrum ents in incorporated entities: Public, Private, Listed,
Unlisted - Equity shares, compulsorily convertible debentures , compulsorily
Government of India makes policy announcements convertible preference shares and share warrants issued by an Indian company
through consolidated FDI policy and press releases
• Capital participation in LLP
whic h are notified by Department Economic Affairs
(DEA), M inis try of Finance, Government of India as • All ins truments of inves tm ent recognized in the FDI policy notified from tim e to tim e
am endm ents to the Foreign Exchange M anagem ent • Units of REITs / InVITs / AIFs
(Non-Debt Instrum ents) Rules, 2019 under the
Foreign Exchange M anagem ent Act, 1999 (42 of 1999) • Inves tm ent in units of m utual funds or Exchange-Traded Fund (ETFs) which invest
(FEMA). m ore than fifty per cent in equity;
In case of any conflict, the relevant Notific ation under • Junior-m ost layer (i.e., equity tranche) of securitization structure;
Foreign Exchange M anagement (Non-Debt
Instruments) Rules, 2019 will prevail. • Ac quis ition, sale or dealing direc tly in immovable property
• Contribution to Trusts 7
• Depository receipts issued against Equity instruments
Entry routes and sectorallimits
AutomaticRoute Prior Approval NegativeList
(Illustrative) (Illustrative) (Illustrative)
• Multibrand retailing– 51% • Lottery, betting and gambling
• Manufacturing sector-100% • Pharmaceutical (Brownfield
• Single brand product retail • Chit fund, Nidhi company
projects) – beyond 74% and up
trading- 100% to 100% • Trading in Transferable Development
• Cash and Carry Wholesale Rights
Trading –100%
• Real Estate Business or Construction of
• E-Commerce –100%
Farmhouses
• Pharmaceutical (Greenfield
projects) –100% • Manufacturing of cigars, cheroots,
• Construction Development – cigarillos and cigarettes, of tobacco or of
100% tobacco substitutes
• Telecom Sector - 100% • Atomic energy, railway operations
• Foreign technology collaborations in any
form

Key amendments –
• Approval route applicable for FDI from the countries sharing land border with India-Press Note 3 of 2020
• As per Press Note 2 of 2021,FDI in insurance sector has been increased to 74 percent from 49 percent under automatic route.
• 100 percent FDI under automatic route permitted for oil and gas PSUs, in case an ‘in-principle’ approval for strategic disinvestment has been
approved by the government. [Press note no. 3 (2021 series)]
• 100 percent FDI permitted under automatic route in Telecom Services [Press note no. 4 (2021 series)]
• 20 percent FDI permitted under automatic route in Life Insurance Corporation ofIndia [Press note no. 1 (2022 series)]
8
PricingGuidelines
Particulars For listed company For unlisted company

Issue / Transfer of Shares Value on the basis o f SEBI Value as per internationally accepted
guidelines pricing method on Arms Length Basis
Resident to Non- Resident : not less
than Fair Value and
Non- Resident to Resident : not more
than Fair Value

The guiding principle shall be that the person resident outside India is not guaranteed any assured exit price
at the time of making such investment or agreement and shall exit at the price prevailing at the time of exit.

Valuation to be certified by SEBIregistered Merchant Banker in case of listed company and CA or SEBI registered
Merchant Banker or practicing cost accountant in case of unlisted company

Subscriptionto Memorandum can be at Face Value

Pricing guidelines applicable both at the time of investment as well exit

Pricing norms not applicable to inter se transfer between two non-residents

In case of share warrants, their pricingand the price or conversion formula shall be determined upfront

In case of a listed Indian company, the rights issue to persons resident outside India shall be at a price
determined by the company. In case of an unlisted Indian company, the rights issue to persons resident outside
India shall not be at a price less than the price offered to persons resident in India
9
FDI – Key reporting / compliance requirements

 Issue of Shares- Intimation to Reserve Bank of India throughBanker/ Authorised Dealer

– Issue of shares - Shares to be issued within 60 days from the date of receipt offunds
– To be reported in Form FC-GPR within 30 days from the issue of equity instruments.
– RBI allots UIN No. / Registration No. for allotment of shares
– Reporting obligation also for issue of Rights and Bonus Shares

 Transferof shares between Residents andNon-Residents

– Reporting formalities through AD Banker in Form FC -TRS within 60 days from receipt of
consideration or transfer of capital instruments whichever is earlier.

 Filing of Annual Returnon ForeignLiabilitiesand Assets with RBI by 15 July every year

10
FDI – International TaxIssues
Capitalgains

 Gains from transfer of shares and other securities are characterized as capital gains

 Capital gains of listed shares / redemption of equity oriented mutual funds (STT paid) taxable at 10 percent (Long-term)
or 15 percent (Short- term)

 Capital gains on transfer of other securities (for e.g., bonds, derivatives) taxable at 20 percent (Long-term) or 30 percent
(Short- term)

 Some of India’s tax treaties provide exemption from capital gains on sale of securities other than shares (for e.g.,
Japan, Mauritius, Singapore, France)

 Some tax treaties provide exemption for capital gains arising from sale of shares (for e.g., Netherlands)

Dividend

 Abolition of DDT – increase in foreign investment

 DDT ~@20.55%, tax rates under treaties now between 5-15%

 FTC for tax paid in India

11
 KnowledgeCheck
Capital Instrument to be issued within days from the date of receipt of the consideration

(a) 60 days (b) 15 days

(c) 30 days (d) 75 days

In which of these companies is 100% FDI permitted?

(a) Company engaged in gambling (b) Company engaged in multi brand retail

(c) Company engaged in automotive manufacturing (d) Company engaged in defence

12
Export of goods and services
 Exports -Basics
Statutory Framework - Section 7, 8 a nd 9 of
FEMA
• Foreign Exchange Management (Export of
goods & services) Regulations, 2015
(Notification no. FEMA23(R)/2015-RB)
• Master Direction on Export of goods and
services by RBI (Updated as on 22 November
2022)
Export of goods and services - Section 7 of
FEMA
Every exporter of goods shall furnish to the RBI
a declaration in such form, containing true and
correct material particulars including the
amount representing the full export value of
the goods.
Definition of Export - Section2(l) of FEMA
• The taking out of India to a place outside India
any goods ;
• Provisions of services from India to any person
outside India.
Realisation and repatriation offoreign exchange
- Section 8 ofFEMA
Where any amount of foreign exchange is due or
has accrued to any person resident in India, such
person shall take all reasonable steps to realise
and repatriate to India such foreign exchange
within such period and in such manner as may
be specified by the RBI
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 Key provisions – Invoicing andDeclaration
Invoicing andRealisation
Invoicing
• No restriction on invoicing of export contracts in INR.
• All export contracts and invoices shall be denominated either
in freely convertible currency or in INR.
• Export proceeds shall be realised in freely convertible
currency.
• INR is not a freely convertible currency, yet.
• However, export proceeds against specific exports may also
be realised in rupees provided it is through a freely
convertible Vostro account of a non-resident bank situated in
any country, other than a member country of theACU.
Realisation
• Period of realization - nine months# from date of export of
goods, software and services
• Period of extension by AD Bank up to six months from the
date of export subject to conditions
# Due to Covid-19, for exports made up to or on July 31, 2020, period is extended by RBI up to 15 months from the date of export
Declaration
Regulation 3 of FEMA 23(R) mandates provision for declarationof
export. Following are key considerations:
1. Every exporter of goods or software shall furnish declaration
form including amount representing:
- Full export value of goods or software; or
- Full export value is not ascertainable at the time of export,
value which exporter expects to receive on the sale of goods
or software in the overseas market.
2. In respect of export of services to which none of the forms are
specified, exporter may export such services without furnishing
any declarations but shall be liable to realise the amount of foreign
exchange which becomes due or accrues on account of export
and to repatriate to India.
3. If realization of export proceeds is from a third party the same
needs to be duly declared in declaration form.
15
 Write-off of unrealized export bills
Exporter can write off the export bills if he is not been able The write-off of export bills is also subject to the conditions that relevant
to realise export proceeds, The limits prescribedare as amount has remained outstanding for more than a year, satisfactory
under: documentary evidence is furnished that exporter has made all efforts to
realise and case falls under one of the categories:
Sr. No. Particulars Percentage

1 Self “write-off” by an 5%* 01 Buyer declared insolvent and certificate from official liquidator*
exporter (Other than
Status Holder 02 Buyer not traceableover a reasonably long period of time
Exporter)
2 Self “ write-off” by Status 10%*
03 Goods exported – auctioned or destroyed in importing country*
Holder Exporters
3 ‘Write-off”by Authorized 10%* Unrealised amount settled through intervention of Indian
Dealer Bank 04 Embassy or Foreign Chamber of Commerce*
*of the total export proceeds realized during the Unrealised amount represent the undrawn balance of an export
previous calendar year preceding the year in 05 bill (not exceeding 10% of the total invoice value)
which the write-off is being done. (limits
available cumulativelyin a year) Cost of resorting to legal action would be disproportionate to
06 unrealisedamount
Exporter shall surrender proportionateexportincentive *AD Bank may allow write-off of exports bills without any lim it
availed,if any, of the relative shipment.

16
Receipt of advance against exports
Exporter shall ensure the shipment of goods within one year from the date of receipt of advance payment and
the documents covering the shipment are routed through the AD Bank through whom advance payment is
made.

Refund of unutilized portion of advances received, after the expiry of said period of one year, cannot be
granted without prior approval of RBI(throughAD Bank).

AD Bank reports inward remittances and advances through EDPMS and issue e-Foreign Inward RemittanceCertificate
(e-FIRC) to the exporter.

AD Bank can allow exporters to receive long term export advance up to a maximum tenor of 10 years to
be utilized for execution of long-term supply contracts for export of goods subject conditions, inter-alia,
including:
• firm irrevocablesupply order;
• company should have capacityto executeorder over the duration;
• company is not under adversenoticeof ED or CBIor such authorities;
• routed through oneAD Bank only.

AD Bank can allow exporters to receive advance payment for export of goods which would take more than a year to
manufacture and ship and where agreement specifies for shipment beyond one year from date of advance receipt,
inter-alia, subject to conditions.

17
Import of goods andservices
 Import -Basics
Regulatoryauthority Meaning ofimport and nature oftransaction
Import trade is regulated by the Directorate
As per section 2(p) of FEMA, the term import
General of Foreign Trade (DGFT) under the
means bringing into India any goods or
Ministry of Commerce & Industry, Department
services;
of Commerce, and Government of India.
Import of goods is a current account transaction
and is permissible unless specifically restricted
StatutoryFramework
Master Direction – Import of Goods and Services
by RBI (FED Master Direction No. 17/2016-17)
(Updated as on 21 November 2022)

Duty of ADbank Mandatory documents required forimports(as

per FTP)
AD banks should ensure that the imports into
India are in conformity with: • Bill of Entry / Airway bill
• Foreign Trade Policy in force; • Commercial invoice cum packing list
• Foreign Exchange Management (Current
Account Transactions) Rules, 2000 framed
by the Government of India; and
• The Directions issued by Reserve Bank
under FEMA from time to time

19
Remittances towards imports
Key points tonote:
• Period of payment - not later than six
months from the date of shipment
• Period of extension by AD Bank up to
further 6 months at a time (maximum up to
the period of three years) - subject to
conditions - illustrative cases asunder:
- Disputes about quantity or
quality or non- fulfilment of
terms of contract
- Financial difficulties
- Cases where importer has filed
suit against the seller
Extension beyond one year subject to
additional conditions (RBI approval
for long overdue payables)
AD Category I Banks may allow remittance for making
payments for imports into India, after ensuring that all
the requisite details are made available by the importer
and the remittance is for bona fide trade transactions as
per applicable lawsinforce.
Note - In view of the disruptions due to outbreak of
COVID-19 pandemic, with effect from 22 May 2020,
the time period for completion of remittances
against normal imports (except in cases where
amounts are withheld towards guarantee of
performance, etc.) has been extended from six
months to twelve months from the date of shipment
for such imports made on or before 31July2020.
20
Third party payment for importtransactions
AD category I banks are allowed to make payments to a third party for import Supplier
of goods, subject to conditions as under: (OutsideIndia)
1. Firm irrevocable purchase order / tripartite agreement should be in place.

2. AD bank should be satisfied with the bonafides of the transactions and

should consider the Financial Action Task Force (FATF) Statement before
Supply of
handling the transactions; goods/services
Thirdparty
3. The Invoice should contain a narration that the related payment has to be
made to the (named) third party; Payment for
imports
4. Bill of Entry should mention the name of the shipper as also the narration
that the related payment has to be made to the (named) third party; Resident
importer
5. Importer should comply with the related extant instructions relating to
imports including those on advance payment being made for import of
goods

21
 Merchant Trading Transactions(‘MTT’)
Customer Supplier
Key featuresof MTT outside India
 Merchanting trade would be a trade where Goods would not enter the C
Domestic Tariff Area
 Considering that in some cases, the goods acquired may require certain B
specific processing/ value-addition, the state of goods so acquired may be A
allowed transformation subject to the AD bank being satisfied with the
documentary evidence and bonafides of the transaction
 Goods permitted for exports / imports under the prevailing Foreign Trade
Policy [‘FTP’] of India as on the date of shipment are only allowed. D

 AD bank shall satisfy itself with the bonafide of the transaction

 The entire MTT is to be routed through the same AD bank.
AD bank will verify invoice, packing list, transport documents and
insurance documents etc.
 The entire MTT should be completed within an overall period of
9 months and there should not be any outlay of foreign exchange
beyond 4 months.
 Short-term credit either by way of suppliers' credit or buyers' credit will
be allowed for merchanting trade transactions, subject to conditions.
Resident importer
A. Customer located outside India place order
with Indian resident
B. Indian residents procure goods from
outside India
C. Non-resident s upplier initiates s hipm ent of
goods from its location to the location of
customer and raises invoic e on resident
importer
D. Along with delivery of goods, resident
importer raises invoice on the c ustom er
outside India for final settlement

22
Set-off of export receivables against importpayables
AD bank may deal with the cases of set-off of export receivables against import payables, subject to following
terms and conditions:
i. Set-off of balances to/from same overseas buyer/supplier
ii. Set-off of outstanding with their overseas group/associate companies either on net basis or gross basis
iii. AD Category – I bank is satisfied with the bonafides of the transactions
iv. Invoices under the transactions are not under investigation by ED/CBI
v. Import/export of goods/services has been undertaken as per the extant Foreign Trade policy
vi. Transactions with ACU countries are kept outside the arrangement.
vii. Set-off of export receivables against goods shall not be allowed against import payables for services and vice
versa.
viii. SEZ units–permitted for both goods and services
ix. Payment for the import is still outstanding in the books of the importer. Further, set-off shall be allowed
between the export and import legs taking place during the same calendar year
x. Each of the export and import transaction shall be reported separately (gross basis) in
FETERS/EDPMS/IDPMS, as applicable

23
 International Tax aspects - Business connection-Section9(1)(i)
 Business connection is an Indian equivalent of Permanent Establishment. It has a wider scope.
 The basic concept is that a non-resident person should be liable to tax for the profits earned in Indiaif he has real
and significant or substantial economic nexus.
 The term is significant for internationaltransactions.

Essential features
 Real and intimate relation must exist between the business activities by a
non-resident carried on outside India and the activities within India
 A course of dealing and continuity of relationship and not a mere isolated or stray
nexus between the business of the non-resident outside India and the activity in
India, would furnish a strong indication of business connection.

Expansion by including SEP to have a far-reachingimpact on NRs

24
 Significant Economic Presence(‘SEP’)
 Existing SEP provisions applicable from AY2022-23.
 SEP definition :
 transaction in respect of any goods, services or property carried out by a NR with any person in India including
provision of download of data or software in India, if it exceeds the prescribed monetary threshold [i.e., INR 20
million (approx. US$ 245,000)]; or
 systematic and continuous soliciting of business activities or engaging in interaction with prescribed
number of users [i.e., 0.3million]
 Following factors not relevant to determine if SEP is constituted
 the agreement for such transactions or activities is entered in India; or
 the non-resident has a residence or place of business in India; or
 the non-resident renders services in India:
 Source Rule includes income from:
 Advertisement that targets India customers
 Sale of data collected from India
 Sale of goods and services using such data collected from India
ITR Forms for AY 2022-23 require a non-resident to disclose about SEP and provide details of aggregate
payments and number of users in India
25
 Equalisation Levy(‘EL’)
Equalisation Levy w.e.f. 1April 2020

Transactions covered Targetedrecipients Exclusions

 Online sale of goods owned  Indian residents  E-commerce operator having a

by a NR e-commerce PE in India and e-commerce
 NRs in specifiedcircumstances supply or services being
operator
 Buyers of goods or services or effectively connected to such PE
 Online provision of services
both using internet protocol (‘IP’) -Under BEPS 2.0 –EL
provided by a NR e-commerce  Sales, turnover, or gross
address located in India to be rolled back
operator receipts of e-commerce
-Transition agreement
Online sale of goods or operator from e-commerce
 with US
provision of services or both, supply or services are less than
facilitated by NR e-commerce INR 20 million (approx. US$
operator 245,000)

 Sale of advertisement or data  If existing EL of 6% is leviable

between non-residents on such transaction
 Rate - 2 per cent
 Intended to be outside the treaty network
 Consideration taxable as royalty/ fees for technical services under the Act read with the treaty not liable to EL
 NR e-commerce operator exempt from income-tax 26
18
 Subject to Tax Rule(‘STTR’)
A top up withholding tax on certain covered related party payments which are subject to a nominal rate below 9 percent

 Applies to inbound and outbound structures

 Applies only to ‘covered payments’
 Applies only when paid to ‘connected persons’
 Applies when tax rate applicable to payment in recipient jurisdiction is below 9% - Nominal Rate with adjustments to be considered (not
ETR)
 Examples of covered payments – Interest, royalties, franchise fees, Insurance/ reinsurance premium, guarantee/ brokerage/
financing fee, rent for moveable property, consideration for marketing/ procurement or other intermediary service

EXAMPLE Key facts / Assumptions

UK Co.  STTR Trigger Rate is 9 percent
 STTR incorporated in India’s treaties with Netherlands
 CIT in NL is 25 percent but tax rate on the lease income is 5 percent
Dutch Co.
Implications
Lease charges for Payment to Dutch Co:
equipment  No withholding tax applies in India on payment of lease charges to
India Co. Dutch Co (No PE/No Tax)
 India gets to levy top-up withholding tax of 4 percent (i.e., 9% - 5%)
27
 KnowledgeCheck
What is the time period to realise the export proceeds and make payments against imports (without
considering extension due to COVID)?

(a) 6 months for both (b) 12 months for exports and 9 months for imports

(c) 12 months for both (d) 9 months for exports and 6 months for imports

In which case is set-off of export receivables against import payables not possible?

(a) Outstanding between group companies for services (b) Outstanding between same overseas buyer/ supplier for goods

(c) Transactions not involving ACU countries (d) Outstanding payable for goods against receivable for services

28
External Commercial Borrowing
Framework

Regulations Master DirectionNo.

FEMA, 1999
Permissible CapitalAccount 5/2018‐19dated 26
Section 6 – Capital
Transaction Regulations March 2019 updated
Account
2000 [FEMA 1] and from time to time (last
Transaction Definition
Borrowing and Lending updated on 30
Regulations 2000 [FEMA3R] September 2022)

FAQs
Circulars (A.P. DIR Series
RBI issued FAQs
Circulars) Notifications amending
on ECB
the Regulations issued by
the RBI from time to time

30
Framework (Cont.)
ECB = Commercial loans raised by eligible resident entities from recognised non‐resident
entities conforming to cumulative parameters such as minimu m maturity, permitted and
non‐permitted end uses, maximum all‐in‐cost ceilingetc.

FCY /INR

ECB Routes

Automatic Route [Upto USD 750 mn per FY. Approval Route [Over and above USD 750 mn]:
Increased to upto USD 1.5 bn for ECB raised • Prior application to the RBI throughAD • Thumb Rule ‐
till 31 Dec 2022]: Bank (in Form ECB) ECB is a Capital
Account
• Recommendation of RBI Empowered Committee
• No approval required Transaction –
(Internal RBI & External Members) for permissible only
• Obtain LRN from RBI by filing Form ECB
application above certain threshold and final as stipulated
through AD Bank
decision by RBI • Monthly data on
• Monthly filings with RBI through AD Bank
• Factors: merits, macroeconomic situations and ECB uploaded
in Form ECB‐2 on RBI website
overall guidelines
• Includes entities under Investigation under
• Post approval, obtain LRN, monthly filings as
FEMA on without prejudice basis
Automatic Route
31
 Eligible Borrowers and RecognisedLenders
Eligible borrowers
• All entities eligible to receive FDI
• Further, following entities are also eligible to raise ECB:
a) PortTrusts;
b) Units in SEZ;
c) SIDBI;
d) EXIM Bank and
e) Registered entities engaged in micro‐finance activities,
viz., registered Not for Profit companies, registered
societies / trusts / cooperatives and Non‐Government
Organizations (permitted only to raise INR ECB).
Recognised lenders
• The lender should be resident of FATF or IOSCO compliant
country, including on transfer of ECB.
• Additionally, following are also recognised lenders:
 Multilateral and Regional Financial Institutions where India is
a member country;
 Individuals can only be permitted if they are foreign equity
holders or for subscription to bonds/ debentures listed
abroad; and
 Foreign branches / subsidiaries of Indian banks : Only for
FCY ECB (except FCCBs and FCEBs)
 Foreign branches / subsidiaries of Indian banks, subject to
applicable prudential norms, can participate as arrangers/
underwriters/market- makers/traders for Rupee denominated
Bonds issued overseas. However, underwriting by foreign
branches/subsidiaries of Indian banks for issuances by
Indian banks will not be allowed
32
Salient Features ofECB
Individual limit of borrowing End Use
− Automatic Route - ECB up to USD 750 The negative list, for which the ECB proceeds cannot be
million or equivalent per financial year utilized include:
irrespective of the category of borrower.
• Real Estate Activities
Limit stands increased from USD 750
million to USD 1.5 billion for ECBs to be • Investment in capital market and Equity investment
raised till 31 December 2022 • Working capital purposes*
• General corporate purposes *
− ECB liability-equity ratio cannot exceed 7:1.
• Repayment of Rupee loans*
− Ratio of 7:1 will not be applicable if the • On‐lending to entities for the above activities,
outstanding amount of all ECB, including the except in case of ECB raised by NBFCs as
proposed one, is up to USD 5 million or its prescribed.
equivalent * Except as prescribed

Currency of ECB:
• ECB can be raised in any foreign currency as well as in Indian Rupees as stipulated
• Change of currency of ECB
− ECB from one convertible foreign currency to any other convertible foreign currency as well
as to INR is freely permitted
− Change of currency from INR to any foreign currency is, however, not permitted.
33
Minimum Average Maturity Period(‘MAMP’)
MAMP for ECB is 3 years (including any put and call option to be only thereafter) except for specified categories
mentioned below for which separate MAMP isprescribed.

Sr. Category MAMP

a) ECB raised by manufacturing companies up to USD 50 million or its equivalent per FY 1 year

b) ECB raised from foreign equity holder for (i) working capital purposes, general corporate 5 years
purposes; or (ii) for repayment of Rupees loans
c) ECB raised for (i) working capital purposes or general corporate purposes; or (ii) on-lending by 10 years
NBFCs for working capital purposes or general corporate purposes
d) ECB raised for (i) repayment of Rupee loans availed domestically for capital expenditure; or (ii) 7 years
on-lending by NBFCs for the same purpose
e) ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than 10 years
capital expenditure; (ii) on-lending by NBFCs for the same purpose

For categories mentioned at (b) to (e) – i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks; ii) the
prescribed MAMP will have to be strictly complied with under all circumstances.

Foreign equity holder means a) Direct foreign equity holder of minimum 25% equity holding by the lender in the borrowing
company; b) Indirect equity holder with minimum 51%; or c) Group company with common overseas parent.
Note: Foreign Equity Holding condition to be fulfilled throughout the tenure of ECB
RBI FAQ No. 12 – Illustration of calculation of MAMP [https://rbidocs.rbi.org.in/rdocs/Content/PDFs/12EC160712_A6.pdf]
34
ECB - International Tax
Issues Foreign Lender- Taxability in India andWithholding

 For loans raised prior to 1 July 2023, Indian company paying interest on foreign currency borrowing to withhold tax at 5
percent as per section 194LC of the Act
 For loans raised post 1 July 2023, Indian company will have to comply with withholding tax obligations as per Section
115A/195 of the Act or treaty provisions whichever are beneficial.

Limitation on interest deduction-Section 94B

 Restricts deduction of interest in the hands of Indian company for payment made to non-resident AE

 Provisions introduced in line with BEPS Action Plan 4

 Indian companies availing foreign currency loans from related parties to be mindful of section94B of the Act

35
KnowledgeCheck
Which entity is not a recognized lender?

(a) Foreign branch of Indian bank (b) Foreign equity holders who are individuals

(c) Lender not resident in FATF compliant country (d) Regional financial Institution where India is a member country

What is the limit for borrowing per FY under the automatic route?

(a) Upto USD 500 million (b) Upto USD 1.5 billion

(c) Upto USD 750 million (d) Upto USD 750 million normally and upto USD 1.5 bn for ECB raised till 31 Dec 2022

36
Overseas Direct Investment
ODI -Framework

FEMA,1999
Section 6 – Capital Account Foreign Exchange Management
Transaction Definition (Overseas Investment)Rules,2022
22 August 2022 issued by Central
Government
Foreign Exchange
Management (Overseas
Investment) Directions, 2022
through AP DIR Circular– 12
dated22August 2022

Circulars(A.P.DIR Series ) FAQs

RBI issued FAQsonODI
Foreign Exchange Management
(Overseas Investment) Regulations,
2022 issued by the RBI andamended
from time to time

38
 ODI -Basics
Overseas Direct Investment Indian entity(‘IE’)
Investment by Indian Entity by way of - • Body corporate incorporated by any law for time
i. Acquisition of unlisted equitycapital of foreign being in force
entity or
• Company
ii. Subscription-MOA of foreign entity or
iii. 10% or more of paid-up equity capital of listed • LLP under LLPAct
FE • Registered partnershipfirm
iv. Investment with control if less than 10% paid
up capital of FE

Foreign entity FinancialCommitment andNetWorth

• Means a foreign entity formed, registered or
incorporated outside India
• IFSC in India
• Limited liability condition not to apply in
case if entity with core activity in strategic
sector
"Financial commitment” means Direct
investment by way of contribution to equity,
loan and 100 per cent of the amount of
guarantees and 50 per cent of the performance
guarantees issued by an Indian Entity to or on
behalf of its foreign entity.
“net worth” shall have the same meaning as in
clause (57) of section 2 of the Companies Act,
2013
39
 \

Key Features ofODI

Approval Route - Investment beyond prescribed limit or non-
AutomaticRoute- General permission- ThroughAD Bank
compliance of condition will require approval of the RBI / CG

Investment in Foreign Entity allowed up to 400% of the Specifically prohibited activities / Investments
networth as per last audited balance sheet
• Real Estate
• Gambling in any form
Bonafide business Indian entity to route all • Dealing in financial products linked to Indian Rupee
activity transactions through one (e.g., non- deliverable trades involvingforeign currency,
branch of AD only etc.)
• Investment / financial commitment in Pakistan
Regularization of all past Loan can be extended to (permissible under approval route) and jurisdictions as
non-compliances at the entities where it has equity may be advised by Central Government
time of making any further participation and control.
FC Backedby loan agreement

Liberalisation of round tripping structures

Indian entity to approach
AD Bank with necessary
documents including
valuation certificate
A person resident in India can now invest in a foreign entity
ODIs can be direct or
through an overseas that has invested or invests into India, either directly or
indirectly, up to 2 layers of subsidiaries, without RBI approval
SPV

40
 Methods of Funding and Obligation of IndianParty
Obligation ofIndian Entity
Drawalof • Receive share certificates / documentary evidence of
foreign
exchange investment within six months, else repatriation of
Proceeds of fromAD- amount invested overseas back into India within that
foreign Bank period
currency Capitalization
funds raised ofExports • Repatriate to India all dues receivable from the foreign
through ADRs entity within 90 days of its falling due
/ GDRs
• Submit FLA Return annually by 15 July

• In case of ODI - submit Form APR by 31 December in

Funding
Mode in respect of each foreign entity based on audited annual
Balance overseas accounts for the preceding year.
held in entity Swap
EEFC of
account of Shares
Indian Party

In
exchange Proceeds
ofADRs/ of ECBs
GDRs

41
 ODI - Loan / guarantee to overseas entities
LOAN
 Only where Indian entity has equity
participation
 the Indian entity has acquired control in
such foreign entity at the time of
making such financial commitment
 The loans by Indian Entity to foreign
entity to be backed by a loan agreement
and interest rate to be on ALP basis.
PLEDGE ON THE SHARES OF FOREIGN
ENTITY
• Permitted to create pledge as a security in
favor of an AD or a public financial institution
in India or an overseas lender, for availing of
fund based or non-fund-based facility for
itself (i.e., the Indian Party) or for Foreign
entities / its SDS
GUARANTEE
• Indian entity can issue guarantee (corporateor
performance)
• To its overseas entity under automatic route
subject to certain conditions
• Step down subsidiary where Indian entity has
acquired control
• No guarantee should be ‘open- ended’
• Where the guarantee is extended by a group
company, it shall be counted towards the
utilization of its financial commitment limit
independently
• Guarantee, to the extent of the amount invoked,
shall cease to be a part of the non-fund-based
commitment but be considered aslending
• Roll-over of guarantee not be treated as fresh
financial commitment 42
ODI – International Tax Issues
Foreign Tax Credit on income from overseas entity

 Income received from overseas entity (e.g., interest, dividend, royalty etc.) may be taxed in the overseas jurisdiction.

 Based on the provisions of section 90 / 91 of the Income-tax Act, 1961 and the relevant DTAA, the Indian entity
ought to be eligible to claim credit of the foreign taxes paid against the taxes to be paid in India on such doubly
taxed income.

 In order to claim FTC, Form 67 needs to be filed online before the end of the AY relevant to the tax year in which such
income was offered to tax. Other criteria with respect to FTC is provided in Rule 128 of the Income-tax Rules, 1962.

43
 ODI – Impact of Pillar Two: GloBERules
Global Minimum Tax of 15 percent - Model rules and commentary published

Income Inclusion Rule (‘IIR’) Undertaxed Payments Rule (‘UTPR’)

 Imposes a top-up tax on the group’s parent  Denies tax deductions or similar adjustments if
entity in respect of low taxed income of the low tax income of a group entity is not
overseas group entities subject to tax under an IIR
 Tax levied in parent entity’s jurisdiction  Tax levied based on an allocationkey

EXAMPLE
Key Assumptions

 UK Co ETR below 15%

CIT 25% LuxCo
 Luxembourg headquartered group has only 2 constituent entities
 Top up tax = 15% less 8% i.e. 7% of UK Co. Income i.e. $ 7

India Co UK Co Implications
Payment
CIT 25% Low ETR  Scenario 1: Luxembourg levies a top-up tax of $7 under IIR
ETR 25%
Income = $100  Scenario 2: If Luxembourg does not adopt IIR, India collects $7 by
CIT 25% denying deduction of expenditure to India Co. under UTPR
ETR 8% 44
 KnowledgeCheck

The total financial commitment made by an Indian entity in all the foreign entities takentogether at the time of
undertaking such commitment shall not exceed ?

(a) 100% of its net worth as on the date of the lastaudited balance sheet (b) 100% of equity

(c) 400% of its net worth as on the date of the last audited balance sheet (d) 400% of equity

45
Liaison / Branch / ProjectOffices
Liaison Office and Branch Office
Liaison Office [‘LO’]
• A place of business to act as a channel of communication
between the principal place of business or Head Office or
by whatever name called and entities in India;
• Does not undertake any commercial/ trading/ industrial
activity, directly or indirectly;
• Maintains itself out of inward remittances received from
abroad through normal banking channel.
Permissible Activities
 Representing parent company / group companies in India
 Promoting export / import from / to India
 Promoting technical/ financial collaborations
between parent/ group companies and companies
in India
 Acting as a communication channel between
parent company and Indian companies
Branch office [‘BO’]
• BO in relation to a Company means any establishment described as
such by the Company. Normally, BO should be engaged in the
activity in which the parent company is engaged. However, it can
carry out only those activities which are permitted by RBI.
Permissible Activities
 Export/ Import of goods
 Rendering of professional or consultancy services
 Carrying out research work, in which the parent
company is engaged.
 Promoting technical or financial collaborationsbetween
Indian companies and parent or overseas group
company
 Representing parent company in India and acting as
buying/ selling agent in India
 Rendering services in Information Technology and
development of software in India
 Rendering technical support to the products supplied by
parent / group companies
 Representing foreign airline/ shipping company
47
Eligibility criteria for a BO/LO
Applications to be made by the Foreign Companies with the AD Category I Bank in Form FNC along with prescribed
documents.

Eligibility For Branch Office For Liaison Office

A profit-making track record during the immediately

A profit making track record during the immediately
Track Record preceding five financial years in the home country
preceding three financial years in the home country

Net Worth Not less than USD 100,000 or its equivalent Not less than USD 50,000 or its equivalent

Applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort from their
parent company/group company, subject to the condition that the parent company satisfies the above eligibility criteria

48
 Project Office - Basics
Meaning of PO
PO means a place of business torepresent the
interests of the foreigncompany executing a project
in India but excludes a LO
Approvalrequirement from RBI
Reserve Bank has granted general permission to
foreign companies to establish POs in India,
provided they have secured a contract from an
Indian company to execute a project inIndia
Defense sector – specific exemption from approval
of the RBI
Proposal for opening a PO relating to defense
sector, no separate reference or approval of GOI
shall be required if the said non-resident applicant
has been awarded a contract / entered into an
agreement with Ministry of Defense or Service
Headquarters or Defense Public Sector
Undertakings
Additional conditions to be adhered to establish a PO
• Funded by a bilateral or m ultilateral International
Financing Agency; or
• Funded directly by inward remittance from abroad;
or
• Have secured the necessary regulatory clearances;
or
• A company or entity in India awarding the contract
has been granted Term Loan by a Public Financial
Institution or a bank in India for the Project.
49
Validity period
Particulars Validity Extension
BO There is no timeline -
PO Tenure of the project -

LO 3 years 3 years from expiry of original period (subject to conditions)

LO – of entities engaged in 2 years No extension

construction and development
Either close the LO or Convert to JV/ WOS [subject to FDI
sectors and NBFC
regulations]

• AD Bank gives extension, provided LO has complied with following conditions:

- LO have submitted its Annual Activity Certificate (“AAC‟) for previous years; and

- Bank account of LO (with AD Bank), is operated in accordance with terms and condition stipulated in RBI approval;

• Extension, if LO is eligible for, should be granted within one month

50
 Liaison Office / Branch Office-International Tax
Role and functioning of Liaison Office (‘LO’)
 Role of liaison office restricted to collectionand
dissemination of information on behalf of its
principal.
 Dependent on its head office for itsexpenses
 No taxability
 Model Commentaries- clarify LO not to be
regarded as PE
Role and functioning of Branch Office(‘BO’)
 Generally engaged in the activity of its parent company
 Extension of head office with a right to accrue income
 Export and import of goods and services.
 Taxable presence. Taxed as a Foreign Company
 Taxed on income pertaining to Indian operations
Exceptions to the general rule of LO
 If activities carried on by LO can be classified
as that carried on by PE then taxability of
income attributable to the LO in India may
arise
 Commercial activities which are core activities of
the taxpayer if carried on by LO, then it may
constitute a PE
Compliances under Income-tax Act,1961
 Branch Office – to file ITR.Also, to file Annual Activity
Certificate (AAC) to be filed with DGIT (Intl Tax)
 Liaison Office – Form 49C, AAC to be filed DGIT (Intl
Tax)
51
 KnowledgeCheck
What is not a permissible activity for an LO?

(a) Promoting export from India (b) Promoting technical collaborations between parent and group company in
India
(c) Representing parent company in India (d) Carrying out commercial activity in India

52
Glossary
Terms used Particulars Terms used Particulars

AAC Annual Activity Certificate EDPMS Export Data Processing and Monitoring System

ACU Asian Clearing Union EEFC account Exchange Earner's Foreign Currency Account

ADR American Depository Receipts EL Equalisation Levy

AE Associated Enterprise ETF Exchange Traded Fund

AIF Alternative Investment Fund ETR Effective tax rate

APR Annual Performance Report FAQ Frequently Asked Questions

AY Assesment Year FATF Financial Action Task Force

BEPS Base erosion and profit shifting FCCB Foreign Currency Convertible Bond

BO Branch office FCEB Foreign Currency Exchangeable Bond

CA Chartered Accountant FCNR account Foreign Currency Non-Resident Account

CBI Central Bureau of Investigation FDI Foreign Direct Investment

CPA Certified Public Accountant FETERS Foreign Exchange Transactions – Electronic Reporting System

DDT Dividend Distribution Tax FIRC Foreign Inward remittance certificate

DGFT Directorate General of Foreign Trade FLA Return Foreign Liabilities and Assets (FLA)Return

DoE /ED Directorate of Enforcement FPI Foreign Portfolio Investment

DR Depository Receipts FTC Foreign Tax Credit

ECB External Commercial Borrowings FTP Foreign Trade Policy
53
Glossary
Terms used Particulars Terms used Particulars

FVCI Foreign Venture Capital Investors LO Liaison Office

FY Financial Year LRN Loan Registration Number

GDR Global Depository Receipts MAMP Minimum average maturityperiod

MNE’s Multinational Enterprise
GoI Government of India
MOA Memorandum of Association
IaaS Infrastructure as a service
MTT Merchanting trade
IDPMS Import Data Processing and Monitoring System
NBFC Non-Banking Financial Company
IIR Income Inclusion Rule
Draft Foreign Exchange Management (Non-debt Instruments -
INR Indian Rupee NDIOI Overseas Investment) Rules, 2021

InVIT Infrastructure Investment Trust NR Non Resident

IOSCO International Organization of Securities Commissions NRE account Non Resident External Account

IP Indian Party NRO account Non Resident Ordinary Account

IP Internet Protocol OCI Overseas Citizen Of India

IRDA Insurance Regulatory and Development Authority ODI Overseas Direct Investment
Draft Foreign Exchange Management (OverseasInvestment)
IT Information Technology OI Regulations, 2021
ITeS Information Technology Enabled Services PaaS Platform as a service
JV Joint Venture PE Permanent Establishment
LLP Limited Liability Partnership PO Project Office

54
Glossary
Terms used Particulars

REIT Real Estate Investment Trust

Saas Software as a service

SDS Step Down Subsidiary
SEBI Securities and Exchange Board of India
SEP Significant Economic Presence
SEZ Special Economic Zone
SNRR account SNRR account
SPV Special Purpose Vehicle
STT Securities Transaction Tax

STTR Subject to Tax Rule

UIN Unique Identification Number
USD United States Dollar
UTPR Undertaxed Payments Rule
WOS Wholly Owned Subsidiary

55
Thank You!
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