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FEMA Advisory
Foreign Exchange Management
What is FEMA and who does it apply to?
FEMA (Foreign Exchange Management Act, 1999) governs all foreign exchange
transactions in India. It applies to any Indian resident, company, or entity that undertakes
cross-border payments, investments, borrowings, or remittances. This includes Indian companies
receiving foreign investment (FDI), individuals remitting money abroad under LRS, and NRIs holding
Indian assets or repatriating funds.
What is the process for reporting FDI received by an Indian company?
When an Indian company receives foreign direct investment, it must file Form
FC-GPR (Foreign Currency-Gross Provisional Return) with the RBI within 30 days of issuing shares to
the foreign investor. Additionally, an Annual Return on Foreign Liabilities and Assets (FLA) must be
filed by July 15th each year. Non-compliance can attract compounding penalties. Our team manages the
entire reporting lifecycle from share allotment to annual filings.
What is RBI Compounding and when is it required?
RBI Compounding is a mechanism to regularise FEMA contraventions — such as
delayed FC-GPR filings, excess remittances, or unreported ODI investments — by paying a prescribed
penalty. It is required when a company or individual has inadvertently violated FEMA provisions. The
process involves filing a compounding application with the RBI, attending a hearing, and paying the
compounded amount. Early voluntary disclosure typically results in lower penalties.
Can an NRI invest in Indian real estate or stocks under FEMA?
Yes, NRIs can invest in Indian real estate and equity markets under specific
FEMA provisions. For real estate, NRIs can purchase residential and commercial properties (excluding
agricultural land) using NRE or NRO accounts. For equity, they can invest through the Portfolio
Investment Scheme (PIS) on a repatriation or non-repatriation basis. All investments must be routed
through designated banking channels and reported as required. Repatriation of sale proceeds is
permitted subject to limits and tax clearances.
What is the Liberalised Remittance Scheme (LRS) and what are its limits?
Under LRS, resident individuals can remit up to USD 2,50,000 per financial year
for permissible purposes including education, travel, maintenance of close relatives abroad,
investment in foreign securities, and purchase of property overseas. The scheme is available to all
resident individuals including minors. Remittances must be made through authorised dealers (banks),
and Form A2 must be submitted. TCS (Tax Collected at Source) at prescribed rates applies on LRS
remittances above certain thresholds.
What is the difference between the old and new income tax regime?
The old regime allows taxpayers to claim numerous deductions and exemptions —
such as HRA, LTA, 80C investments, home loan interest, and medical insurance — resulting in a lower
taxable income. The new regime (default from FY 2023-24) offers lower slab rates but eliminates most
deductions. For individuals with significant investments and eligible deductions, the old regime may
still be beneficial. We analyse your specific situation each year to determine the most tax-efficient
option for you.
When is a Tax Audit mandatory for a business or professional?
Under Section 44AB, a Tax Audit is mandatory if: (a) a business has gross
turnover exceeding ₹1 crore (₹10 crore if 95%+ transactions are digital), or (b) a professional has
gross receipts exceeding ₹50 lakh. Taxpayers opting out of presumptive taxation under Section
44AD/44ADA with income below the presumptive threshold may also require a tax audit. The audit must be
completed and Form 3CA/3CB with Form 3CD must be filed by September 30 of the assessment year.
How should I respond to an Income Tax Notice?
First, identify the type of notice — whether it is under Section 143(1)
(intimation), 143(2) (scrutiny), 148 (reassessment), or 156 (demand). Each requires a different
response approach. Do not ignore any notice — missing the deadline typically leads to ex-parte
assessments or penalties. Gather supporting documents, verify the figures cited, and file a proper
response within the prescribed time. Our partners handle income tax notices from the first response
through to appellate proceedings if required.
What is Transfer Pricing and when does it apply to my business?
Transfer pricing regulations under Sections 92 to 92F apply when an Indian
entity undertakes transactions with associated enterprises located outside India. These "international
transactions" include payment of royalties, management fees, purchase/sale of goods, provision of
services, loans, and guarantees. The transactions must be priced at arm's length — i.e., as if they
were done between unrelated parties. A Transfer Pricing Study (benchmarking) must be maintained, and
Form 3CEB must be filed. Penalties for non-compliance can be severe — up to 2% of the transaction
value.
What are the TDS obligations of a business making payments to vendors?
Businesses are required to deduct TDS on various payments — including rent
(Section 194I), professional/technical fees (194J), contractor payments (194C), commission (194H), and
interest (194A) — at prescribed rates when the payment crosses the threshold limit. TDS must be
deposited with the government by the 7th of the following month (April 30 for March). Quarterly TDS
returns (Form 24Q/26Q/27Q) must be filed, and TDS certificates (Form 16/16A) issued to deductees.
Failure to deduct or deposit TDS attracts interest and disallowance of the expense.
GST registration is mandatory if your aggregate turnover in a financial year
exceeds ₹40 lakh for goods suppliers (₹20 lakh for special category states) or ₹20 lakh for service
providers. Regardless of turnover, registration is compulsory for inter-state supply of goods,
e-commerce operators, persons required to deduct TDS under GST, and casual taxable persons. Voluntary
registration is also available for smaller businesses seeking input tax credit benefits.
What is the difference between CGST, SGST, and IGST?
Under GST, the tax is split between the Centre and the States. For intra-state
transactions (buyer and seller in the same state), both CGST (Central GST) and SGST (State GST) are
levied, each at half the applicable rate. For inter-state transactions (buyer and seller in different
states or union territories), IGST (Integrated GST) is levied at the full rate by the Centre, and
later apportioned to the destination state. Understanding which applies is critical to correctly
charging tax, raising invoices, and claiming input tax credit.
How does Input Tax Credit (ITC) work and what are the conditions?
ITC allows a registered taxpayer to reduce the GST paid on inputs from the GST
payable on outputs — effectively taxing only the value added. To claim ITC, the supplier must have
filed their GSTR-1, the tax must have been paid by the supplier to the government, the goods/services
must have been received, and a valid tax invoice must be in possession. ITC cannot be claimed on
certain blocked credits such as motor vehicles (with exceptions), food, entertainment, and personal
expenses. Reconciling ITC with GSTR-2B monthly is critical to avoid mismatches.
What returns does a regular GST taxpayer need to file?
A regular GST taxpayer must file: GSTR-1 (outward supply details — monthly by
11th or quarterly under QRMP scheme), GSTR-3B (summary return with tax payment — monthly by 20th or
quarterly under QRMP), and GSTR-9 (annual return — by December 31). Additionally, GSTR-9C
(reconciliation statement) is required for taxpayers with turnover exceeding ₹5 crore. Late fees apply
for delayed filing, and ITC reversal may be required for non-reconciled credits.
What is an e-invoice and who is required to generate it?
E-invoicing is mandatory for B2B transactions for businesses with aggregate
turnover exceeding ₹5 crore in any preceding financial year (as of the current threshold). Under this
system, invoices must be reported to the Invoice Registration Portal (IRP) in real time, which
generates a unique IRN (Invoice Reference Number) and QR code. The e-invoice details are
auto-populated in GSTR-1, reducing manual data entry. Failure to generate e-invoices where mandatory
renders the invoice invalid and the recipient ineligible to claim ITC.