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Foreign remittances: From monitoring to managing

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T. R. Shastri

FOREIGN inward remittance was always welcomed in India with higher interest rates and tax exemptions from the days of the oil price boom in the 1980s, when the exodus of Indian workers to West Asia commenced.

However, in the wake of instances involving inflows of drug or terror related funds, the authorities have started talking of quality of remittance and quantitative steps such as ceiling and taxes. Globally also, greater emphasis is laid on the KYC (know your customer) principle to track and monitor funds flow. Examples are the US's Patriot Act of 2001, FATF guidelines, and so on.

Various agencies engaged in handling international remittances such as Western Union, MoneyGram and Banks have embedded KYC compliance guidelines in their software. In India, the only law which lays down any kind of regulations on foreign inward remittance is the Foreign Contribution (Regulation) Act, 1976 (FCRA). It was enacted to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by Indian individuals, associations, etc, to ensure that parliamentary institutions, political associations and other voluntary organisations and important individuals function in a manner consistent with the values of a sovereign democratic republic.

The FCRA prohibited acceptance of foreign contribution by election candidates, political parties, newspaper and government officials, etc. It required government registration or permission for cultural, economic, educational, religious or social associations to accept foreign contribution involving prescribed maintenance of books, separate bank account, reporting to the Centre. The government was free to inspect or seize the books and impose penalty or punishment for violation of any rules mentioned in FCRA. The Central Government also had overriding powers to impose such restrictions on any one else.

Over 30,000 non-governmental organisations, public charitable organisations, religious bodies and the like have received substantial amounts in foreign exchange through this route. The annual receipt of funds under the FCRA is over $1 billion. As per 2003 figures, the US (over 33 per cent) followed by Germany and the UK were the lead source countries. Delhi followed by Tamil Nadu and Andhra Pradesh were the main receiving States. Rural development, health-care and natural calamities relief were the main purposes for which nearly a third of the funds were received. To educate the public on the FCRA, the Ministry of Home Affairs had taken a number of user-friendly steps, such as setting up a Web site (www.mha.nic.in), which contains the citizens' charter highlighting different provisions of law, procedures, forms, etc. The Ministry also organised a two-day seminar on FCRA jointly with Institute of Chartered Accountants of India in June this year in which more than 500 delegates participated.

A task force set up by the Planning Commission had dubbed the procedures under the FCRA as "cumbersome, non-transparent and source of harassment". It made specific suggestions to simplify procedures and soften the rigour of the Act. Many NGOs and other stakeholders recommended on-line submission of application forms and returns as a way of rendering the Act easier to use. Some had even suggested its abolition. But due to large volume of the remittance involved and proven instances of misuse of funds, the Home Ministry considers the FCRA a "national security legislation" and an essential one.

Based on feedback from various quarters, the Home Ministry has drafted a new Bill the Foreign Contribution (Management and Control) Bill, 2005 and this has been referred to a Group of Ministers (GoM) for deliberation. The Bill recommended, by the GoM, will be placed before Parliament. When enacted, it will repeal the FCRA but within two years existing registered beneficiaries have to obtain a `Registration Certificate' under the new Act.

Basic concepts such as category of persons prohibited from or requiring permission/registration for accepting foreign contribution, criminal nature of offences, etc, remain unchanged even under the new Bill. But it aims at ensuring better balance between the twin competing objectives of facilitating NGOs for flow of foreign funds and addressing security concerns. The new Bill provides for appeal and a management outlook to forex. The Preamble also specifically prohibits acceptance and utilisation of foreign contribution or foreign hospitality for anti-national activities. As per the new Bill, associations engaged in the production or electronic broadcast of audio/visual news are now prohibited from receiving foreign contribution. The proposed law envisages a decentralised structure to avoid applicants coming to Delhi for registration. It seeks to introduce the concept of `registering authority', one of which is the Central Government (Section 12). The full list of registering authorities will be part of the rules to be formulated and expected to cover State-leveldepartments.

It concedes a long-standing demand of exempting contributions received as scholarship for studies in India, towards Indian conference fee or as subscription for an Indian journal. The new law will increase the value of exempted gift from Rs 1,000 to Rs 10,000. While the beneficiary of the remittance has to use the money only for permitted purposes, a new provision now permits defraying of up to 30 per cent towards government-defined administrative expenses.

As earlier, foreign contribution can be received at only one bank account, though several bank accounts can be opened for utilisation of the funds, say at different locations where an NGO may be undertaking developmental work. The Bill explains elaborately (Section 12) the factors that will be taken into account before according permission or rejecting an application.

Though there have been repeated suggestions to reduce the paper work and administrative hassles, the Bill envisages otherwise. For example, in its 53 Sections compared to the 32 Sections in the FCRA, 29 issues require detailed rules to be framed compared to just eight earlier. The Bill introduces the concept of Registration Certificate (validity: five years renewable during the last two years) whereas the earlier rule merely mentioned registration.

Under the FCRA, if an application was not disposed of within 90 days, it was deemed to have been approved; but the new Bill has omits this self-disciplining clause. The Bill envisages submission of returns and statements to the Centre (Section 43) and also to the Registering Authority and such other authorities (Section 18). The Bill will permit disposal of asset acquired out of unauthorised foreign contribution (Section 22). There are a few changes in the penalty and appeal provisions.

The simplifications in the forms, returns and statements will be known only when the rules are notified. Thus while a couple of suggestions of the stakeholders have been accepted, the basic rigidity remains. It is the right time for NGOs to offer their comments to the Ministry before the Bill crystallises into an Act.

(The author is Consulting Editor, Centre for Business Research, ICFAI Business School, Bangalore.)

(This article was published in the Business Line print edition dated August 10, 2005)
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