The two terms resident and non-resident have different meanings altogether under the two enactments. As per section 6(1) of the Income-tax Act, 1961, the residential status of a person is to be determined only on the basis of the number of days stay in India by that person in the relevant previous year. Under FEMA the residential status is determined mainly on the basis of the intention of the person to stay in India. This has led to some confusion and complexity. The understanding of the purpose of both the laws would help to understand the difference. Under the Income-tax Act, 1961, the object is to tax the income of the whole year. If a person is a resident, his global income will be taxable in India. If a person is non-resident only the income earned in India is taxable and the income earned outside India is not taxable in India. Under FEMA there are regulations for undertaking transaction themselves and the regulations differ for residents and non-residents. For example, an Indian resident cannot make deposits in NRE/FCNR accounts which are meant for non resident Indians. Similarly, if a person wants to borrow from a bank in USA there are several restrictions on residents, whereas NRIs being non residents can borrow freely. In view of such circumstances, it is not possible to wait for the year to complete for determining the residential status under FEMA. Therefore, one ought to precisely know the difference in the meaning of the two terms under the two enactments. Another misconception about FEMA is that it applies to only non-residents. In fact it applies to residents also particularly while dealing with foreigners and non residents.

The primary object of FERA was to conserve foreign exchange on account of shortage of foreign exchange and to regulate the foreign exchange. It was in the nature of criminal law of different kind. It provided for presumption of ‘mens rea’; i.e., guilty mind. Even preparation, and attempt amounted to offence under FERA. Arrest and detention by Directorate of Enforcement was a normal feature of FERA. As such FERA was a good example of a draconian law in India. As against this the new law, FEMA is civil in nature and has brought in a major change in the law concerning foreign exchange. There is a marked change from FERA to FEMA. The change is brought out in the process of liberalization and also on account of sufficient foreign exchange reserve. In fact the process of change started from 1991 itself with series of benevolent circulars were being issued under FERA, which has ultimately resulted in enactment of FEMA. As such, FEMA is the benign avatar of FERA with a marked difference. While dealing with international tax and structuring cross border transactions (inbound and outbound investments) it is of immence benefit to learn and understand FEMA for a tax practitioner.

Special Story – FEMA

In October 2003, we had a special story on ‘NRI – FEMA & Taxation’ dealing with the provisions of FEMA & Taxation concerning NRIs. Considering the plethora of notifications issued very frequently, it was felt necessary to present FEMA with latest updates (upto 31st August 2005). In this Special Story the provisions of FEMA have been considered in details. An attempt is made to cover all important aspects of FEMA in the Special Story. This Special Story will be very much useful to all our members as a reference material in their day-to-day practice. I thank Shri N. K. Bhatt for designing the Special Story and Shri Natwar Thakrar and Shri Kirit Dedhia for assisting him in co-ordinating with the authors. I also thank all authors for sparing their valuable time and giving their articles within the scheduled time.