Crypto businesses in India – brief regulatory overview
Background
1. Cryptocurrencies have gained a lot of traction in recent times in India which is home to one of the largest markets for cryptocurrencies in the world. According to a report, the country currently ranks second in cryptocurrency adoption.
2. On Feb 01, 2022, the Indian authorities (for the first time) acknowledged the cryptocurrencies in India by considering them as Virtual Digital Assets (VDA) and providing an elaborate taxation regime specifically targeted for these VDAs. As of the date of this article, these tax proposals are still in the draft stage and are yet to become law.
General overview
3. At the outset, currently, there is no specific law/regulation/licensing requirement that is applicable on the crypto exchanges/businesses which are operating in India. Depending on the form of entity, the crypto exchanges would be required to obtain customary approvals from the applicable authorities for doing business in India. For instance, if a crypto exchange is operating in the form of a company then it shall have to adhere to the necessary provisions of the Companies Act, 2013, and its underlying rules.
4. Of course, such crypto exchange inter-alia would also have to obtain tax-related approvals and registrations from relevant tax authorities. The exchange would have to obtain a Permanent Account Number (PAN), a Tax Deduction and Collection Account Number (TAN), and a Goods and Services Identification Account Number (GSTIN), and would have to carry out necessary compliances applicable under the relevant tax laws (for example – filing of income tax returns, monthly deposition of withholding tax, filing of quarterly withholding tax returns, issuing withholding tax certificates, filing of monthly and annual goods and services tax returns, etc.).
5. The above requirements are general in nature and are equally applicable to any entity that wants to operate and run any other business in India. Till date, there is no regulatory framework that is specifically applicable on the crypto exchanges in India or which governs its functioning. Having said that, there have been few instances in the past where regulators have acknowledged (or investigated) crypto-related transactions in India.
Regulatory developments in India till date
6. The Reserve Bank of India (RBI), which is the central bank of India and is the chief authority responsible for regulating the financial sector in India, officially acknowledged cryptocurrency in India through a press release in 2013 for the first time. The RBI cautioned the users, holders and traders of cryptocurrencies regarding the potential economic, financial, legal and security-related risks associated with dealing in such cryptocurrencies, and discouraged people from indulging in the same. Subsequently, the RBI reiterated its strict stand vide press releases in 2017.
7. Thereafter, the RBI issued a ‘Statement on Developmental and Regulatory Policies’ on April 5, 2018 (Statement), which expressly prohibited banks (being a regulated entity) from dealing in crypto currency or providing any services to any market participants in support thereof. The RBI instructed the bankers to exit its relationships within a specific time limit. This instruction from the RBI made it practically impossible for private crypto exchanges and traders to do crypto business in India.
8. All these complications led to filing of a petition before the Supreme Court of India (the apex judiciary in India) against the Statement of the RBI. The Supreme Court of India in a landmark ruling, in the case of Internet and Mobile Association of India v. RBI, set aside / quashed the Statement on March 4, 2020.
9. During the pendency of the proceedings before the Supreme Court, on February 28, 2019, the legislature proposed to introduce a draft bill known as ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019’ which prohibited mining, holding, selling, trading, issuance, disposal or use of cryptocurrency in the country i.e. a complete blanket ban. However, owing to the industry objections and complaints, the draft bill was never introduced in the Parliament.
10. A new bill titled as ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ is expected to be put forth before the Parliament in the upcoming sessions which will provide for regulations with respect to the crypto world in India. The bill also proposes the issuance of a digital currency by the RBI called Central Bank Digital Currency (CBDC) / Digital Rupee which will use the underlying technology of cryptocurrencies but will be backed by Government security.
11. On Feb 23, 2022, the Advertising Standards Council of India (ASCI), after consultation with the government, has issued guidelines with respect to advertising and promotion of crypto assets in India. The ASCI is a self-regulated advertising authority in India created for ensuring the protection of the interests of consumers.
12. Broadly, these guidelines (among other things) provide that the crypto currency related ads should have a disclaimer “Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.” Further, the terms “currency”, “securities”, “custodian” and “depositories” should not be used in ads of crypto products.
13. As far as reporting for crypto exchanges are concerned, the Ministry of Corporate Affairs (the authority for regulating companies in India), vide a notification dated March 24, 2021 made it mandatory for companies dealing with cryptocurrencies to disclose profit or loss incurred on transactions, the amount of cryptocurrency they hold and deposits or advances from any person. Therefore, the crypto exchanges are required to clearly disclose profit / loss and other details in the financial statements with regards to the crypto transactions.
14. Moreover, it is an industry practice for crypto exchanges in India to keep a general KYC (know your customer) related information of all the traders and investors registered on their platforms.
15. It is also imperative to discuss about the applicability of Goods and Services Tax Act, 2017 on crypto exchanges. Goods and Services Tax (GST) is an indirect tax in India which typically applies on supply of goods and services. Considering that crypto exchanges earn income in the form of transaction fees for completion of a transaction effectively, the GST authorities would treat the same as commission income which would be taxable at 18%. Recently, it was all over the news that the Directorate General of GST Intelligence (DGGI) conducted search and raids on WazirX, Coinswitch Kuber, Coin DCX (being some of the biggest crypto exchanges of India), and other such crypto exchanges over potential GST evasion. Therefore, crypto exchanges which want to enter the Indian market should be mindful of such requirements.
16. Further, it was also reported that the Enforcement Directorate (ED), which is the agency responsible for enforcing economic laws in India, has issued a notice to WazirX in relation to violation of provisions of the Foreign Exchange Management Act, 1999 and Prevention of Money Laundering Act, 2002.
17. The fate of above investigations is still unclear as these have not yet reached finality, and no order or judicial ruling is not available in the public domain. Hence, it is essential to keep an eye on the developments that may happen in the near future.
Expectations in future
18. The regulators in India has neither considered dealing in cryptocurrency as illegal nor as legal. With the introduction of new crypto tax regime in India, it is highly anticipated that new regulations / law / clarifications with respect to crypto transactions would be soon introduced by the Government. Interesting times ahead.
(Thanks for reading, the author of this article is Deepak Pareek. In case of any queries, he can be reached out to taxdecoded2021@gmail.com)
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Can you suggest any leading CA in Lucknow who is dealing with crypto cases.