Economics Prelims cum Mains

RBI alters ‘relative’ definition to check outward remittances

The News

  • The Reserve Bank of India (RBI) has narrowed the definition of relatives under Liberalised Remittance Scheme to check the flow of funds.

 

Key Highlights

  • Concerned over funds sent abroad under the Liberalised Remittance Scheme (LRS), the RBI has narrowed the definition of close relative to mean only immediate relatives such as parents, spouses, children and their spouses.
  • This is done by aligning the definition of ‘relative’ with the definition given in Companies Act, 2013 instead of Companies Act, 1956.
  • It aims to prevent the misuse of the LRS for commercial purpose which is not its objective.
  • Besides, RBI has introduced a system for daily reporting of individual transactions under the LRS by banks.
  • This enables banks to view remittances already made by an individual during the fiscal, thus improving monitoring and ensuring compliance.
  • The central bank has also made furnishing of PAN mandatory for such transactions.

 

Context

  • In recent times, the Reserve Bank of India is scrutinising dealings under the liberalised remittance scheme driven by suspicion that the window has been misused to launder money.
  • It is suspected that the LRS facility is being misused for commercial purpose.
  • Outward remittances under maintenance of close relatives shot up to almost $3 billion in 2017-18 from a mere $174 million in 2013-14.

 

 

What is Liberalised Remittance Scheme?

  • Under the Liberalised Remittance Scheme, Authorised Dealers like banks may freely allow remittances by resident individuals up to USD 2,50,000 per Financial Year for any permitted current or capital account transaction or a combination of both.
  • The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.
  • It is available to all resident individuals including minors.
  • The limit of USD 2,50,000 per Financial Year (FY) under the Scheme also includes both current account and capital account transactions.
  • LRS was introduced to allow Indians to buy stocks and properties abroad.
  • The scheme, however, cannot be used to take pure speculative bets on instruments such as derivatives.
  • Remittances defined under Foreign Exchange Management Amendment Rules, FEMA 2015 for current account transactions include private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad education abroad .
  • Other permissible capital account transactions by an individual under LRS are opening of foreign currency account abroad with a bank, purchase of property abroad, investment in units of Mutual Funds, Venture Capital Funds, promissory notes, setting up Wholly Owned Subsidiaries and Joint Ventures and loans including loans in Indian Rupees to Non-resident Indians.

 

Modus operandi of misuse of LRS

Money laundering and Tax evasion:

  • Some individuals remit $250,000 to an overseas bank account.
  • Then they buy shares worth $100,000 of an unlisted company set up by service providers in a tax haven.
  • Then lend the remaining $150,000 to the tax haven company which repays the loan from its earnings.
  • Further undisclosed wealth stashed abroad flows into the company which shows it as income from some trading activity.
  • Having ‘earned’ the money, the company uses it to repay the loan; thus, $150,000 flows back to the LRS bank account as loan repayment amount.
  • This is one of the ways to regularise undeclared money lying abroad.

Round-tripping of funds

  • In some cases funds are brought back as FDI (foreign direct investment) to Indian companies.
  • If money flows back as dividend (paid out by an LRS company), it’s taxed in India.
  • However, tax can be evaded entirely if the offshore LRS entity invests the amount as equity of a company India. Such transactions are viewed as round-tripping of fund.

 

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