As proposed in Union Budget 2024-25, to simply the rules and regulations for foreign investment and with an intent to simply the “ease of investment” and “ease of doing business”, the department of Economic Affairs has notified Foreign Exchange (Compounding Proceedings) Rules, 2024 which shall supersede the earlier Foreign Exchange (Compounding Proceedings) Rules, 2000.
The amended rules emphasize expediting and streamlining the processing of compounding applications, the introduction of digital payment options for application fees and compounding amounts, and a focus on simplification and rationalization of the provisions to eliminate ambiguity and clarify the process.
1. Compounding Authority:
The Director of Enforcement or any of the following officers authorised by the Central Government shall be the compounding authority:
- an officer of the Directorate of Enforcement not below the rank of Deputy Director or Deputy Legal Adviser;
- an officer of the Reserve Bank not below the rank of the Assistant General Manager.
2. Enhancement of monetary limit for compounding:
The monetary limit determines the power of officers to compound the contraventions. The new compounding rules have substantially enhanced such monetary limits to the following extent:
a. Compounding Authority of Reverse Bank of India:
The Officer of the Reserve Bank of India shall have the authority to compound the offenses, other than the offense incurred under section 3(a)* of the Foreign Exchange Management Act, subject to the following monetary limit:
| Officer | The sum involved in contravention does not exceed(Earlier) | Sum involved in contravention does not exceed(Earlier) |
| An officer not below the rank of Assistant General Manager of RBI | INR 60 Lacs | INR 10 Lacs |
| An officer not below the rank of Deputy General Manager of RBI | INR 2.50 Crores | INR 40 Lacs |
| An officer not below the rank of General Manager of RBI | INR 5 Crores | INR 1 Crores |
| An officer not below the rank of Chief General Manager of RBI | More than INR 5 Crores | More than INR 1 Crore |
b. Compounding Authority of Directorate of Enforcement:
The offense occurred under Section 3(a)* of FEMA shall be compounded by the Directorate of Enforcement subject to the following monetary limit:
| Officer | Deputy Director of the Directorate of Enforcement |
| Special director of the Directorate of Enforcement | INR 5 Lacs or Less |
| Additional Director of the Directorate of Enforcement | More than INR 5 Lacs but less INR 10 Lacs |
| More than INR 10 Lacs but less than INR 50 Lacs | More than INR 10 Lacs but less INR 50 Lacs |
| Special Director along with the Deputy Legal Adviser of the Directorate of Enforcement | INR 50 Lacs or more but less than INR 1 Crores |
| Director of Enforcement along with the Special Director of the Directorate of Enforcement | INR 1 Crore or more |
*As per Section 3(a) of FEMA, no person shall deal in or transfer any foreign exchange or foreign security to any person not being an authorised person.
c. Time limit for second or subsequent compounding
- No compounding shall be carried out for any contravention committed within 3 years from the date on which a similar contravention committed by him was compounded under these rules.
- For compounding, any second or subsequent contravention committed after the expiry of a period of 3 years from the date on which the contravention was previously compounded shall be considered as the first contravention.
3. Increase in Application Fee for compounding
- Application for compounding shall be filed in Form electronically along with application fee of INR 10,000/-. Earlier the application fee was INR 5000/-.
- Further, now the applicant shall be allowed to pay for application fee through NEFT or other online electronic modes.
- Earlier the taxpayer was allowed to make payment through Demand Draft only.
- Such a facility shall ease the process of filing applications for compounding.
4. New rule of discounting of adjudication proceedings:
- As per Rule 6 of compounding rules, Where any contravention is compounded before the adjudication of such contravention under section 16 then no inquiry or further inquiry shall be initiated or continued against the applicant against such contravention which has been compounded.
5. Procedure of compounding
- The compounding authority may call for any additional information relevant to the compounding proceeding and may also require the applicant to take such action as may be necessary.
- The compounding authority shall pass the compounding order as expeditiously as possible but not later than 180 days from the date of receipt of a complete application. The order shall be issued after providing an opportunity to be heard.
6. Case not eligible for compounding
As per newly inserted Rule 9 of Compounding Rules, the following cases shall not be eligible for compounding:
- where the amount involved is not quantifiable;
- where the provisions of section 37A of the Act are applicable. Section 37A provides special provisions relating to assets held outside India in contravention of section 4
- Where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money laundering, terror financing, or affecting the sovereignty and integrity of the nation. Such case shall be transferred to the appropriate Adjudicating Authority for adjudicating contravention under section 13;
- where the Adjudicating Authority has already passed an order imposing a penalty;
- where the compounding authority is of the view that the contravention involved requires further investigation by the Directorate of Enforcement to ascertain the amount of contravention under section 13 of the Act.
7. Payment of compounded amount through various modes:
- The amount determined to be payable as per the compounding order shall be paid within 15 days from the date of the compounding order.
- Payment for compounded amounts can be made through DD, NEFT, RTGS, or Other permissible electronic or online payment. Earlier, the taxpayer was eligible to make payment through DD only and it was extremely difficult to complete the payment within 15 days through DD.
- If a person fails to make the payment within 15 days then it shall be deemed that he has never made an application for compounding.
Conclusion
New Compounding rules have certainly improved the process of compounding by facilitating electronic mode of payment for application fees and compounded amounts. Earlier, the taxpayer was only allowed to make the payment through DD which was a time-consuming process and involved extra charges as well. Further, enhancement of monetary limit for compounding matters shall expedite the process of compounding.
