Introduction
Cryptocurrencies are an emerging form of digital currency that is making its presence spread across the globe very rapidly. While the world is split between legalizing and banning cryptocurrencies, it is necessary to understand various implications of holding & transacting in such assets prior dealing with it in any particular country/jurisdiction. However, it is pertinent to understand the compliances, taxability and other provisions from overall legal perspective to know the statutory implications of transacting, holding or dealing in any other way with such assets. We are going to bifurcate such statutory implications in 3 major parts as follow: From the perspective of –
- Reserve Bank of India
- Direct Tax & Indirect Tax
- Companies Act & MCA Matters
1. Reserve Bank of India
In India, the Crypto currencies are still outside the ambit of regulation by Reserve Bank of India (RBI) and hence, continues to be an unregulated sector. However, such transactions have been covered to make a part of reporting regulations through notifications & amendments recently.
Department of Revenue, Ministry of Finance (GoI) vide its Notification No. 1072(E) dated 7th March, 2023 inserted/amended following to the Prevention of Money-laundering Act, 2002:
“In exercise of the powers conferred by sub-clause (vi) of clause (sa) of sub-section (1) of section 2 of the Prevention of Money-laundering Act, 2002 (15 of 2003) (hereinafter referred to the as the Act), the Central Government hereby notifies that the following activities when carried out for or on behalf of another natural or legal person in the course of business as an activity for the purposes of said sub sub-clause, namely: –
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- exchange between virtual digital assets and fiat currencies;
- exchange between one or more forms of virtual digital assets;
- transfer of virtual digital assets;
- safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and
- participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.
Explanation: – For the purposes of this notification “virtual digital asset” shall have the same meaning assigned to it in clause (47A) of section 2 of the Income-tax Act, 1961 (43 of 1961).”
Further, vide Finance Bill 2022, Act No. 6 of 2022, w.e.f. 1-4-2022, the term “virtual digital asset” (VDA) is inserted in clause (47A) of section 2 of the Income Tax Act, 1961 defining the term as follows:
“(47A) “virtual digital asset” means—
1. 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;
2. a non-fungible token or any other token of similar nature, by whatever name called;
3. any other digital asset, as Central Government may, by notification in the Official Gazette specify:
Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
Explanation.—For the purposes of this clause,—
1. “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
2. the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);]”
On analysis of the above, it can be concluded that cryptocurrency shall form part of virtual digital assets which is now covered under the ambit of PMLA, 2002. Further, such inclusion is made for the purpose of covering VDA under the definition of “person carrying on designated business or profession” which is further, a part of “reporting entity”.
Accordingly, the consequence of inclusion of VDA under PMLA will be that now every transaction involving VDA shall be required to be covered under RBI reporting norms. Any entity carrying out activities for or on behalf of another natural or legal person (eg: crypto exchanges) is now required to-
1. perform Verification of Identity (KYC, Aadhar authentication) of such persons u/s 11A
2. maintain records of such person & his transactions u/s 12
3. report transactions performed towards VDA
4. Indian crypto exchanges will have to report suspicious activities to the Financial Intelligence Unit India (FIU-IND)
5. other matters as maybe prescribed from time to time.
2. Direct Tax & Indirect Tax
Income from the transfer of cryptocurrencies and non-fungible tokens shall be taxed at the rate of 30% plus applicable surcharge and Cess u/s Section 115BBH of the Income Tax Act, 1961. Also, TDS is made applicable on sale transactions of crypto assets exceeding more than Rs. 50,000/- in a single financial year at the rate of 1% u/s 194S.
Further, Section 115BBH prohibits offsetting crypto losses against crypto gains, or any other gains or income for that matter. Indian crypto investors are also not allowed to claim crypto-related expenses except the cost of acquisition/buy price.
Union Budget 2023 clarifies that Indian Investors trading in crypto/NFTs will be required to declare their income as capital gains if assets are held for investment purposes, or business income, if assets are held for trading purposes. A new schedule “Schedule – Virtual Digital Assets (VDA)” is now included as part of ITR forms for FY 22-23 as below:
| Schedule VDA | Income from transfer of virtual digital assets | |||||
| SL No. | Date of Acquisition | Date of Transfer | Head under which income to be taxed (Capital Gain) | Cost of Acquisition (In case of gift; a. Enter the amount on which tax is paid u/s 56(2)(x) if any b. In any other case cost to previous owner) | Consideration Received | Income from transfer of Virtual Digital Assets (enter nil in case of loss) (Col. 6 – Col. 5) |
| (Col. 1) | (Col. 2) | (Col. 3) | (Col. 4) | (Col. 5) | (Col. 6) | (Col. 7) |
| Add Rows | ||||||
| Total (Sum of all Positive Incomes of Capital Gain in Col. 7) | (Item No. C2 of Schedule CG) | |||||
The sale of goods in India is subject to GST at specified rates pertaining to the type of goods sold. Should VDAs be classified as “goods”, each transaction would attract GST. A seller is typically required to charge the buyer/service recipient the prescribed GST and deposit the same with the authorities. Presently, the service fee being collected by Exchanges is being subjected to an assessment for GST.
There remains, of course, the matter of cross-border VDA transactions and the related interplay between withholding tax and Double Taxation Avoidance Agreements. The movement of VDAs across borders, to and from wallets and exchanges poses an unresolved legal challenge on how to accurately tax the sale of VDAs internationally.
3. Companies Act & MCA Matters
Ministry of Corporate Affairs (MCA), GoI, has vide its Notification dated 24th March, 2021 has amended the Schedule III to the Companies Act, 2013 effective from 01st April, 2021 to mandate various disclosures by companies in their financial statements. The new disclosures in Schedule III with respect to the virtual currency/crypto currency transactions undertaken by companies during a financial year are added as follows:
“Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial year, the following shall be disclosed:-
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- profit or loss on transactions involving Crypto currency or Virtual Currency
- amount of currency held as at the reporting date,
- deposits or advances from any person for the purpose of trading or investing in Crypto Currency/virtual currency.”
Miscellaneous Matters
RBI has supported the creation of India’s own Central Bank Digital Currency (“CBDC”), which has recently received an enabling legal framework in the form of amendments to the Reserve Bank of India Act, 1934 (“RBI Act”). Also, the Finance Minister made a special mention in the Union Budget 2022-23 for introducing the nation to the concept of the “Digital Rupee”, a CBDC that she notes will increase the impact of India’s digital economy. She further stated that the CBDC will also “lead to a more efficient and cheaper currency management system”. It is in this context that the finance minister proposed the introduction of the Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India.
The Finance Minister’s Union Budget speech was coupled with specific amendments to the RBI Act, which expanded the definition of the term “bank note” to mean a bank note issued by RBI, whether in physical or digital form. This amendment opens up the door for RBI to issue its own CBDC.
Conclusion
Going through the above provisions we can imply that dealing in crypto currencies is not an illegal activity or a banned activity, since it is nowhere clearly mentioned or notified as such. Further, various reporting requirements are made applicable on transactions or people involved in dealing of cryptocurrencies which maybe a step towards legalizing it as a part of long-term plan of government. However, the time period until which such status of cryptocurrencies would continue cannot be determined and the government at any point of time may also tender such currency as invalid form of currency and might render it as illegal in India. Accordingly, as of now, it is a very grey area as to determination of legal status of crypto in India. One should take utmost care while dealing with cryptocurrencies and ensure all compliances that are prescribed as of now and should also contemplate the scenario where it may be made illegal in future. Especially with the RBI introducing its own CBDC, “Digital Rupee”, chances are high that all other cryptocurrencies would be notified as unregulated & illegal and the only legalized tender of digital currency in India would remain as “Digital Rupee”. The reporting & taxation provisions notified till date may be with the intention of covering “Digital Rupee” only and not other cryptocurrencies. Key differences between CBDC and Crypto may remain in future as follows:
| Parameters | Digital Currency | Cryptocurrency |
| Overview | Fiat currency in electronic form that can be used in contactless payments | It is a store of value that is present on a blockchain |
| Regulations | Regulated by RBI | Unregulated |
| Volatility and Acceptability | Each country will notify their own Digital currencies and hence will be stable and accepted worldwide | Cryptocurrencies are highly volatile in nature and may not be legally acceptable globally |
Companies Act states that “A company may be formed for any lawful purpose” accordingly until any legal status is granted to Cryptocurrencies, the same shall be at the discretion of Registrar of Companies to decide whether to grant a company registration for the purpose of dealing in crypto or not. However, in the scenario of government making it illegal, such company would be considered as incorporated for unlawful objects and might attract legal actions, penalties and other such steps as may be notified from time to time.
It is pertinent to note that all of these analysis and assumptions come with a lot of “IFS & BUTS” and no precise conclusion can be made with the information available at the moment.
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