FEMA Regulations: Impact of Proposed FEMA Regulations on GCC Operations in India

Bengaluru: The proposed Foreign Exchange Management Act (FEMA) regulations are set to bring changes to Global Capability Centres (GCCs) operating in India. These entities will move from a self-service model to being subject to regulatory oversight, with the primary objective of simplifying and streamlining remittance and invoicing processes. Under the new regulatory framework, Authorised Dealer (AD) banks will be given enhanced powers and responsibilities to ensure a more efficient and transparent system for managing foreign exchange transactions. GCCs will have to adapt to these changes and work closely with their AD banks to ensure compliance. Authorised Dealers, which are well-performing banks, have been given permission by the RBI to conduct a range of foreign exchange transactions. These dealers play a key role in facilitating foreign exchange transactions for both individual and commercial customers. By 2025, there will be 1,900 GCCs in India, up from 1,600 at present, with a market size of $60 billion, according to a Nasscom-KPMG report. At least 37% of respondents cited clarity on FEMA as one of the key regulatory priorities for GCC leaders. The RBI has released the draft export and import regulations under FEMA for public comments, covering both products and services. The regulations are expected to make it easier for importers and exporters of all sizes to do business. The draft regulations state that the value of services must be realised and repatriated to India within 9 months from the date of invoice and introduce a standardised export declaration form for goods and services, including software exports. It also mentions that the current export regulations do not impose any filing or reporting requirement for exports of services. AD banks are required to implement the board-approved policy within six months of the approval of the regulations. Professional services firm KPMG, in a note, mentioned that the draft regulations introduce a standardised export declaration form that exporters have to file for goods and services, including software exports. Gaurav Mehndiratta, partner and national head of corporate and international tax at KPMG in India, said, “Earlier, it was self-compliance in a way. I don’t think that’s a hurdle and now there will be a lot more clarity. Earlier, GCC countries were not entirely clear whether some of these guidelines were applicable to them because they were talking about exports of goods. Now, there is more clarity on the applicability of the provisions, including the additional requirement to list invoices in a certain way for those that are being issued in the database. In fact, it could play out the other way around if it turns out to be a bit more liberal than other provisions that clarify a lot of things.” Ritika Loganey Gupta, partner – tax and regulatory services at EY India, said that due to their higher reliance on export/import transactions, the GCC sector is particularly likely to benefit from this amendment. “The reduced transaction time will lead to increased efficiency, reduced costs and will bring in new business to the GCC countries. Further, delegating authority to AD banks will enable real-time monitoring and tracking of transactions, reducing the risk of non-compliance arising from unsettled invoices in the Export Data Processing and Monitoring System (EDPMS), which is the platform used by banks in India to report export transactions. EY also said that service exporters are required to submit the form to the AD banker within 21 days of the date of invoice, which was earlier required only for exports of goods/software. The draft guidelines do not specify any timeline for advance payment of export and import transactions, which will be governed by the terms of the agreement. The KPMG report has identified several best practices, including comprehensive documentation supporting foreign tax credit claims and treaty benefits, and a robust data collection mechanism to mitigate multiple tax demands.