THE POLICY LAB-27
JULY 21 , 2023

By J B Mohapatra

ONE salient factual ground on the basis of which an auditor by the name of Murali Krishna Chakrala was discharged from prosecution in the Madras High Court order in Criminal Revision case no 1354 of 2022 (Murali Krishna Chakrala vs Deputy Director of Enforcement- 2022-TIOLCORP-13-HC-MAD-PMLA), a case that involved presentation of fake import documents for transfer of foreign exchange to entities abroad, and where the auditor was found to have issued 15CB certificates (under rule 37BB of the Income Tax Rules) without ensuring due diligence, is contained in para 6 of that order and runs as below:" Mr Nitraesh Nataraj, learned counsel, further contended that form 15CB for making overseas payments towards import is not even required under the law and that is why, except for State Bank of Travancore, all other nationalised banks had transferred the funds based on the import documents without insisting upon a form 15CB from a chartered accountant. Has Murali Krishna Chakrala been part of the conspiracy, he would not have gullibly uploaded the certificates in to the Income tax Department portal on the same day."

While the court took cognisance of this factual averment, allowed the revision and discharged the defendant from prosecution on larger grounds such as (a) the chartered accountant is required only to examine the nature of remittance and nothing more and (b) he is not required to go into the genuineness or otherwise of the documents submitted by his clients, what strikes in the impugned order is the unequal interpretation of the Foreign Exchange Management Act, 1999 (FEMA), the Income Tax laws and RBI's master circulars on foreign exchange transactions at the level of the authorised persons on the ground, leaving open possibilities of asymmetric legal consequences for the remitters.

It is correct that RBI for holistic forex management under FEMA is neither expected to nor has attempted to micro-manage the remittance procedure at the level of the authorised persons through executive instructions and directions. This is in the spirit of section 10(5) of FEMA, 1999 and runs as below:

"An authorised person shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declaration and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of any contravention or evasion of the provisions of this Act or of any rule, regulation, notification, direction or order made thereunder, and where the said person refuses to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person, report the matter to the Reserve Bank."

In respect of remittances under the liberalised remittance scheme (LRS), RBI's master directions dated 1.1.16 under para 2 and para 5- operational instructions to authorised persons- read as below:

"The Reserve Bank will not generally prescribe documents which should be verified by the Authorised Persons while releasing foreign exchange for current account transactions. In this connection, attention of authorised persons is drawn to subsection (5) of section 10 of FEMA, 1999 which provides that an authorised person desiring to transact in foreign exchange to make such a declaration and to give such information as will reasonably satisfy him that the transaction will not involve and is not designed for the purpose of any contravention or evasion of the provisions of FEMA or any rule, notification or order issued thereunder. (para 2)

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Reserve Bank of India will not issue any instruction under FEMA, regarding the procedure to be followed in respect of deduction of tax at source while allowing remittances to the non-residents. It shall be mandatory on the part of the authorised dealers to comply with the requirement of the tax laws as applicable. (para -5)"

RBI's master circular 17 - import of goods and services - dated 1-1-16-, while bringing in a level of awareness of few points in foreign trade for example the requirement of an import licence or a bill of entry, time limit for settlement of import payments, advance remittance, broadly guides the authorised persons the need for adherence to the binding legislations and governing instructions at the very preface as below: " Import trade is regulated by the Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce and Industry, Department of Commerce, Government of India. Authorised Dealer Category 1 (AD Category 1) banks should ensure that imports into India are in conformity with the Foreign Trade Policy in force and Foreign Exchange Management (Current Account Transactions) Rules 2000 framed by the Government vide Notification No GSR 381 (E ) dated May 3, 2000 and the directions issued by the Reserve Bank under Foreign Exchange Management Act, 1999 from time to time."

Within the broad operational guidelines of RBI and the latitude afforded under those, individual banks discharge their obligations in a manner that is operationally feasible and not in derogation of any applicable clause of any binding legislation or RBI's directions. For example, action points such as (a) bona fide of the importer/ customer particularly a new customer (b) financial status and standing of the importer (c) obtaining credit report on the suppliers in liable cases (d) whether the importer is ordinarily engaged in the manufacturing or trading in the commodity sought to be imported (e) age of the importer's accounts with the bank (f) requirement of an examination of importer's balance sheet or a visit to its place of business in liable cases (g) IE code and import license details (h) standard precautions with regard to direct receipt of import bills, are constituents of standard due diligence exercise, though the procedure and the rigour expected under the regulations for ensuring an effective due diligence greatly vary across banks. For example, Form A2 ( for remitting foreign exchange) template issued by the RBI does not contain requirement of filling in any column with regard to compliances by way of furnishing of form 15CA or 15CB (for taxation purposes), though there are clear asymmetry across banks, some insisting upon and others dispensing with that requirement.

As the Income Tax statute stands today, requirement of furnishing information by the remitter of any remittance to a non-resident or to a foreign company, whether or not chargeable to tax under the provisions of the Income Tax Act, in terms of section 195(6) thereof has been dispensed with under rule 37BB in 2 situations: (a) an individual's remittance not requiring RBI approval as per section 5 of the FEMA 1999 read with schedule III of Foreign Exchange (Current Account Transactions) Rules 2000, in other words all payments under the liberalised remittance scheme and (b) remittances for investment in equity or debt or in real estate or loans or advance payment for imports or towards settlement of import invoices etc totalling 33 different purposes.

While a clear identifiable mis-appreciation and mis-application of the standard TDS or tax related compliance at the time of authorising remittance of foreign exchange at the ground level is what led to discharge of an auditor in the case referred earlier, the larger questions ride on the back of our ever increasing import burden (US $ 610 billion in FY 21-22 up from US USD 394 billion in FY 20-21), and the manner in which fraudulent cases of import of goods and services would have aided both in siphoning of undisclosed income and in facilitating availment of inadmissible benefits under the FTP schemes (under advance authorisation or duty free import authorisation or schemes under EOU/ EPZ/SEZ/EHTP/STP/BTP/FTWZ), evasion of anti- dumping duties and misuse of FTA with huge implications for IGST or VAT.

Mis-declaring the descriptions of import, or the quantity, specification, country of origin, its end use or cases of fake import invoices for goods and services, if left undetected at the systems level, does require substantial time, energy and good fortune for their discovery at a later date and ensuring the necessary regulatory consequences. Redesigning a standard template across authorised persons to effect remittance of foreign exchange to obviate unequal procedural compliance requirements, and a re-look at the formulation under rule 37BB of the Income Tax Rules (which presently does not require information on remittances under LRS and 33 other remittances of varied nature including for imports and investments) to capture and collate the high risk foreign exchange transactions could be the starting points at the systems level for establishing an effective regulatory and enforcement structure to prevent abuse of the current processes.