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Late Submission Fees (LSF)- A Substitute to Compounding under FEMA?

March 13, 2020     by Kavita Agrawal

Inflow of funds from a foreign country is governed as per the provisions of FEMA. When the funds hit the bank accounts of entities in India, the clock starts ticking for reporting to be done under FEMA. But it is not always feasible to adhere to the specified timelines due to coordination required with Authorised Dealer Bank (AD Bank) and Remitter Bank for basic documents.

This leads to delayed filings in most of the cases of inward remittance. The former FEMA regulations provided for compounding as the only remedy for making the default of delayed reporting good.

It is pertinent to mention here that a Regulator is created by the Legislature to implement and enforce specific laws. In order to ensure that serious offenders are brought to book, it is necessary to de-clog the space by enabling systems to deal with the offences that are essentially procedural and technical in nature.

Requiring the entity to go in for compounding for all technical lapses leads to enormous administrative burden and high cost to the economy. Therefore, there should be a structure for dealing with the offences of procedural or technical nature promptly.

With this objective, RBI introduced the concept of Late Submission Fees (LSF) vide Notification dated 7th November 2017. LSF was a welcomed initiative as this would result in benefits both for the reporting entity and the regulator. For reporting entity, FEMA compliances would be convenient without the need for investing time and effort involved in compounding and for RBI, it would considerably reduce the number of compounding cases pending with it. Before going forward with examining the post- LSF scenario, let us briefly understand the nature of defaults which cause delay in reporting.

Understanding Common Defaults

The defaults under FEMA are usually procedural or technical in nature. However, in order to understand the scope of LSF, it is significant to differentiate between the defaults which only involve delay in reporting and the ones which involve contravention of the provisions under FEMA and applicable guidelines of RBI.

  • Defaults involving Delay in Reporting- On a very conservative estimate, more than 95% of the compounding cases before RBI relate to delay in reporting. These defaults include the following:
    1. Delay in reporting of inflow of funds received from a person resident outside India for allotment of shares {Paragraph 9(1)(A) of Schedule 1 of old regulations*, now Regulation 13.1(1)}.
    2. Delay in submission of form FC-GPR with RBI on allotment of shares {Paragraph 9(1)(B) of Schedule 1 of old regulations, now Regulation 13.1(2)}.
    3. Delay in filing of FLA returns ({Paragraph 9(2) of Schedule 1 of old regulations, now Regulation 13.1(3)}.
    4. The defaults involving delay in reporting usually occur due to factors beyond the control of the reporting entity. In some cases, the delay occurs due to complexity of the transaction which leads to ambiguity in reporting.

  • Defaults involving Contravention of FEMA Provisions- Contravention means an action which offends the law. These defaults may include the following:
    1. Delay in allotment of shares to a person resident outside India beyond 60/180 days (Paragraph 8 of Schedule 1 of old regulations, now Paragraph 2 of Schedule I);
    2. Taking on record of transfer of shares from resident to non-resident without certified form FC-TRS from AD Bank (Regulation 4).
    3. Contravention may occur due to many factors including complex transactions, lack of knowledge of applicable provisions etc.

*FEMA 20/2000-RB dated May 3, 2000 

Change in Reporting Structure by RBI- Recent Past Scenario

Substitution of e-Biz with FIRMS portal w.e.f. 1st September, 2018, brought with it many challenges. One of them being the reporting of complex remittances as there were limited fields for reporting. Single Master Form (SMF) being a new domain for the stakeholders as well as Authorized Dealer Banks, there was lack of clear guidance and therefore, completing reporting within relevant timelines became a tedious and time-consuming task. In many cases, there were multiple rejections before a form could be approved.

It is pertinent to take note that the reporting is deemed to be completed for LSF purposes only when form SMF, complete in all respects, is submitted on FIRMS portal and subsequently approved. This means that LSF was to be levied even for the period during which reporting, though done, was not considered since the same was rejected by Authorised Dealer Bank later, either on its own accord or on the directions of RBI, due to incomplete or ambiguous information provided in the form.

Current Scenario

Though some of the issues have been ironed out, it is still in an evolving phase, where every now and then something new comes to the notice of the stakeholders while making submissions on FIRMS portal, and hence, it leads to procedural or technical delays in reporting. The introduction of LSF, similar to the concept of “Additional Fee” in case of delayed reporting to Registrar of Companies (RoC), has addressed these delays and helped the stakeholders in making the default good by mere payment of LSF, which is in contrast to earlier provisions of FEMA wherein if the reporting was not done within the due dates, the only option available was to move an application for compounding.

The FAQs released by the RBI explain that for the transactions undertaken on or after November 7, 2017, in case of reporting delays, the defaulting entity shall be liable to pay LSF in order to regularise the said delays without undergoing the compounding procedure.

Here, it is to be understood that LSF is applicable only in cases of delayed reporting. If there is a default involving contravention of FEMA guidelines, mere payment of LSF shall not make the default good. In such cases, the defaulting entity has to move an application for compounding in addition to payment of LSF (if there is delayed reporting along with contravention of FEMA provisions), which is calculated and specified by RBI as per the method stated in the regulations.

Inference

After objective assessment of the existing regulatory framework and with the aim to de-burden the Department of matters of routine nature, LSF was brought in. Its introduction has reduced the number of compounding cases to an extent and therefore, it has benefited both the regulator and the reporting entities. It would be a welcomed initiative if RBI introduces similar suitable options for dealing with the cases involving commonly committed contraventions, instead of moving an application for compounding for all the contraventions.

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