Representation on Compounding under FEMA

Dear Sir,

Re : Joint Representation on Compounding under FEMA

First of all we thank you for giving us a personal hearing on
this subject. Considering the issues
discussed at the hearing, we have had discussions within our organisations.
Final drafting has taken some time. We are sorry for the delay.

We now submit as under :

1. Amnesty Scheme :

1.1 An Amnesty Scheme exclusively under FEMA may be announced
with effect from 1st April, 2010. It may remain open till 30th September, 2010.
In our opinion, this scheme will not violate Government’s undertaking to the
Honourable Supreme Court regarding future Amnesty Schemes.

1.2 We may divide the FEMA lapses & violations in following
categories :

(i) Procedural Lapses e.g.,
Forms/declarations have not been filed in time or filed late. Other than the
above, the transactions per se are permitted; or would be permitted if
an application had been made.

(ii) Innocent Lapses — especially where there is no
loss of foreign exchange, or where the loss is minimal. (e.g., an NRI
has given a loan to his brother/friend.)

Amnesty Scheme NOT to cover :

(iii) Serious violations where transactions are not
permitted per se. (e.g., ECB funds used in stock market.)

(iv) S. 3 Violations like Smuggling, Hawala, etc. S. 8
violations like — Indian residents keeping funds abroad in violation of FEMA.

The Amnesty Scheme should be for all lapses covered under the
first two categories. (The above will need more elaboration. We can provide the
same.) A scheme which may be declared may carry detailed lists to avoid
ambiguity. The scheme may not cover violations listed under paragraphs (iii) and
(iv) above. Our entire representation does not cover these exclusions.

1.3 Wide publicity may be given and the scheme may be
explained by a series of conferences and lectures throughout the country.

More details of the scheme are given in Annexure 1.

After 30th September, 2010 a lenient scheme may be adopted
for compounding. This is discussed below.

2. Small offences :

2.1 A threshold-amount of small offences may be determined.
All lapses below the threshold may be ignored as far as compounding/penalty
procedures are concerned. For example, a limit of U.S. $ 20,000 or Indian rupees
ten lakhs per person per year may be fixed. These amounts may be considered
insignificant, not liable to any penal proceedings. For comparison, under the
Income-tax Act, all amounts earned by a person below Rs.1,50,000 per year are
totally exempt from Income-tax. The person is not liable to tax at all. This
leaves 96% of Indians outside tax discipline.

A blanket exemption may be abused. However, RBI will always
have the power to issue appropriate instructions under FEMA. RBI may refer a
case to the Enforcement Directorate whereever it finds a deliberate abuse of any
reliefs.

2.2 At present, while computing the amount of offence, series
of transactions are totalled up. For example, in case of an impermissible loan
by an NRI to a resident friend/relative, all receipts and payments during the
period are added and counted as several lapses. In fairness, the loan should be
considered as one violation. Peak amount outstanding during a period may be
considered as the amount of lapse.

3. Technical lapses :

Amounts above the threshold may be considered leniently if
they are technical lapses i.e., covered under the first two categories
listed in paragraph 1.2. Some illustrations of technical offences are considered
below and in Annexure 2.

4. NRI investment :

NRIs were specifically permitted around the year 1982 by the
then Finance Minister Mr. Pranab Mukherjee to invest in India through OCBs.
Around 1992, the scheme was further liberalised by the then finance minister Dr.
Manmohan Singh. Then because one Indian share-broker committed frauds through
Mauritius OCBs, in 2003 all NRIs were prohibited investment through OCBs. An
arbitrary step where innocent NRIs have been punished.

Unfortunately, NRIs still keep investing in India through
their own trusts or offshore companies. These are lapses, not violations. These
investments are not crimes. They should be dealt with leniently and regularised
with token compounding sums.

5. Compounding sums :

5.1 FEMA is not a revenue law. Compounding process is to
deter people from repeating FEMA lapses; and to save them from Enforcement
Directorate’s procedures. RBI may not be tough with common men and may not link
the amount of compounding sums with presumed gains made by the investors. The
compounding sum may be linked to the gravity of the offence concerned and
intention of the parties. It should not have any relationship with the amount of
investment or gains.

There have been cases where the Compounding Authority has
presumed gains where the investor has made no gains. This is arbitrary and
unjust.

5.2 S. 13 of FEMA is an indication of the amount of
compounding sum that the law-makers intended. In most cases, the compounding sum
may not exceed Rs.2,00,000. If the matter is found to be far more serious, the
Compounding Authority may specify the reasons in the Compounding Order and then
charge a higher amount.

5.3 Time for paying compounding sum should be 3 months. The
current time of 15 days is too short.

6. FIPB and RBI :

6.1 In case of FDI in real estate development, there is a difference of opinion between RBI and FIPB. Investors who would have taken FIPB ap-proval; or gone under automatic route as permitted by the Industrial Policy would naturally follow FIPB view. They should not be considered as violators of FEMA. Some day the difference would be resolved. Once the final policy is announced, investors should follow the policy. Until then all investments made and properties held should be permitted. Even after the announcement, past investments should not be disturbed.

6.2 At present, certain areas under FEMA are administered by FIPB and certain areas by RBI. In case of a violation of Industrial Policy, the investor has to go for regularisation to FIPB and for compounding to RBI. Dual procedures for one single offence is against natural justice. For all matters administered by FIPB, the regularisation and compounding powers should vest with FIPB. Since the Compounding Rules do not grant authority to FIPB for compound-ing, let FIPB give post facto approvals.

    Accused person’s views?:

7.1 Difference of opinion between two honest and knowledgeable persons is normal. Difference between FIPB and RBI is a strong illustration. Similarly, there can be differences between the RBI/ FIPB and a professional or an investor. When there is an honest difference of opinion in interpretation of law, no penalty may be levied.

7.2 Currently, the person making a compounding application has to admit the offence. This is unfair. A person should be allowed to represent his views.

It is normal that a person may not admit to the violation, but to buy peace, he is willing to pay the compounding sum. If the person is forced to admit a violation without an opportunity to defend himself, it will defeat the principle of natural justice.

An applicant may not agree with Compounding Authority’s order and may not pay the compounding sum. Transferring all papers submitted by him including evidences and confession to the Enforcement Directorate would amount to gross injustice.

7.3    Legal representation?:

Under FERA, people were regularly represented by professionals — chartered accountants and lawyers. Legally, even under FEMA, people have a right to be represented by professionals. In practice however, for almost ten years, RBI officers flatly and strongly refuse professionals’ representations.

Legal representation should be allowed for all matters including compounding.

    Appellate process?:

If the applicant does not agree with the Compounding Order, he should get an opportunity to appeal. This is necessary as there can be differences of opinions between RBI and the businessman. These can be resolved only by an independent Appellate Authority.

We suggest that the Executive Director, FEMA should constitute first Appellate Authority. Appropriate authority (more senior to the RBI Director) in the Fi-nance Ministry may constitute final Appellate Authority within the Government. Further appeal may lie in the appropriate Court of Law.

    A speaking Order?:

In order that the person can appeal, the compounding order should be a ‘speaking order’. i.e., the order should give full reasons for arriving at a particular decision. For example, “considering the circumstances, I am of the view that penalty should be Rs.?.?.?.?.?.”, may not be sufficient.

The order may state the specific circumstances that guided the Compounding Authority to come to a particular view. The order may also state the interpretation of the accused which is not accepted by the Compounding Officer. Reasons may be given.

    Compounding and post facto approval?:
The compounding order should mean that the trans-action has been approved. There should be no need for taking any further approval.

Alternatively, where an approval is required, both the compounding process and post facto approval should be given simultaneously. The time for such a process may be increased from 6 months to 9 months.

    Authorised Dealers (ADs)?:

Authorised Dealers (ADs) are the major stumbling block in FEMA compliance. RBI insists on all forms being filed through ADs. But the ADs are neither interested, nor competent to understand and implement FEMA.

Please introduce the procedure of E-Filing of all forms and even compounding applications and Amnesty applications. Where necessary, the Authorised Dealers’ report may be called for separately.

    Other FEMA issues?:

We submit that there are several rules which cause avoidable difficulties to the concerned persons. If the rules are made clearer, it will help in reducing the lapses and violations. These issues are separate from the Compounding rules. Hence we are not submitting anything on the FEMA rules in this representation.
We request you to allow us to submit separate representation for FEMA rules. We can first discuss the modalities before we submit the same.

We wish to once again thank you for allowing us to represent before you. We will be glad to discuss the matter personally. We request you to kindly grant us an appointment for discussion.

Thanking you,

Yours faithfully,

For Bombay Chartered Accountants’ Society    
Vice-President    
Mayur Nayak
    
For The Chamber of Tax Consultants
President
Gopal Kandarpa