The current situation of Cryptocurrencies in the jurisdiction of India
The price of cryptocurrencies like bitcoin increased exponentially from $5 in 2012 to $1000 in 2017. During this period, many cryptocurrency exchanges were established in India. It is also punctuated by two press announcements from the Reserve Bank of India (RBI) on cryptocurrencies. Firstly, cryptocurrencies were not backed by the RBI, and secondly, their value is speculative since it is not supported by an asset. Post-2016, India saw an online banking boom as a result of demonetisation and smartphone penetration. Many tech-savvy Indians started investing in cryptocurrencies hereafter.
Later in 2017, an interesting event took place. A Public Interest Litigation (PIL) was filed in the Supreme Court requesting to regulate the trading of cryptocurrencies in India and ensure that it is answerable to the Exchequer. “The lack of any concrete mechanism pending the regulatory framework in said regard has left a lot of vacuum and which has resulted in total unaccountability and unregulated Bitcoin (crypto money) trading and transactions,” the petition pleaded. Further, the petition sought answers from the finance, information technology, law and justice ministries along with RBI and Securities Exchange Board India (SEBI). The petitioner claimed that RBI and SEBI have been trying to shift their cognizance towards one another for regulating cryptocurrencies as there was confusion as to whether it’s a currency or a commodity.
Involvement of the Government
The Department of Economic Affairs presented an inter-ministerial recommendation to the Union in August 2017, however, the specifics of the report were not publicly disclosed. The crux of the report are-
- Cryptocurrencies would fall under the scope of the RBI Act, 1934, implying that they might be considered a currency.
- Cryptocurrency transactions should be taxable.
- The RBI should regulate and issue directions as to investment in cryptocurrencies.
- And lastly, if any cross-border transaction is made in cryptocurrency, it should fall under the scope of the Foreign Exchange Management (FEMA) Act, 1999.
Although back in 2013, the RBI refused to regulate any kind of virtual currencies.
In 2018, the RBI issued a circular prohibiting commercial and cooperative banks, payments banking institutions, small financing banks, Non-banking finance corporations (NBFC), and payment system providers from trading in cryptocurrencies and offering services to all corporations which deal with them. When cryptocurrency exchanges were unable to utilize banking services in India, their companies are decimated immediately. As a result, several crypto exchanges filed a writ petition in the Supreme Court. Finally, in March 2020, the Supreme Court found in favour of the crypto exchanges and struck down the said notification as unconstitutional. Following the decision, the crypto market saw a surge of up to 700% in the following year. One prominent reasoning the Supreme Court gave was that cryptocurrencies are unregulated but not illegal in India. This gave a rebirth to the crypto market in India.
However, the struggle for crypto early adopters, in India was far from over. On January 29, 2021, the Indian government declared that it will introduce legislation to develop a sovereign digital currency and, as a result, will prohibit the use of private cryptocurrencies. The Standing Committee on Finance convened with the Blockchain and Crypto Assets Council (BACC) and other crypto stakeholders in November 2021 and determined that cryptocurrencies should be regulated rather than prohibited. Prime Minister Narendra Modi also presided over a discussion on cryptocurrency with key authorities in early December 2021.
The finance minister coined crypto trading as a “risky area” while speaking in Parliament. She stated that they had yet to make a decision on cryptocurrency advertisements. The announcement comes only one day after she was reported in the Lok Sabha as claiming there was no intention to acknowledge cryptocurrency as legal tender in the country.
The Budget Session 2022
The Lok Sabha approved the Finance Bill 2022, which imposed a new tax on virtual digital assets (cryptocurrencies) beginning in April 2022. Any income derived from the exchange of virtual assets will be taxable by 30%. The newly amended Finance Bill further urged that any losses incurred as a result of the transference of virtual assets be prohibited from being offset against profits derived from the sale or transference of some other virtual asset. Legally speaking, Section 47A has been inserted in the Income Tax Act defining “virtual digital asset” as, ”any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;”
No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. 3) Set off and carry forward of loss: No loss from transfer of virtual digital asset cannot be set off or carry forward and set off against any other income.
The Bill also suggested a 1% TDS (tax deducted at source) on virtual currency transfers exceeding INR 10,000 per year, as well as taxes on such gifts in the possession of the receiver. The TDS threshold limit will be INR 50,000 per year for selected persons, including individuals and HUFs (Hindu Undivided Family) required to have their financial statements reviewed under the Income Tax Act. This will primarily serve as a tracking mechanism for the IT Department to be able to verify IT returns filed.
The major concern across all exchanges is the 1% TDS. They’re not sure if the 1% TDS will be applied to every single transaction. Their issue is that if that happens, high-net-worth individuals would stop trading in cryptocurrency in India. So, more clarity is needed with respect to the 1% TDS. Further, clarification of the term “transfer” and “virtual digital asset” need to be elaborative for various cases and scenarios.