LEGAL OR NOT?- THE REGULATORY JOURNEY OF CRYPTOCURRENCY IN INDIA
Author: Adv. Siddhi Gokuldas Naik, II year of LL.M. (Specializing in Criminal Law) from V.M.Salgaocar College of Law, Miramar-Panaji, Goa
With the emergence of digitalization in every field, the automated evolution has been extremely fundamental and money has been no exception. In the era where everything is digitalized, a virtual type of cash called cryptocurrency has developed.
In recent years, there has been a huge evolution of cryptocurrency and not only the general public has shown its interest in the same but large organizations and countries have recognized its significance. This currency though might be a step towards revolution but it also raises certain questions on its safety, as cryptocurrencies such as Bitcoin, Ethereum, and others have been used for illegal purposes in the past.
FIRST, LET US THE LEARN ABOUT THE EVOLUTION OF CRYPTOCURRENCY IN INDIA
The concept of cryptocurrency was first introduced to the world in the year 2009 by the inception of bitcoin by a group of anonymous people. Speculations are made that it was brought into existence by a person named Satoshi Nakamoto. It was crafted to make this kind of currency independent ofgovernment control and for the convenient usage of people from across various countries.
The use of cryptocurrency has significantly grown popular since it has made online transactions expedient and hassle-free. There is no involvement of a thirdparty which also saves on additional expenses.
As far as India is concerned, after the introduction of cryptocurrencies in the year 2009 the Government of India and the Reserve Bank of India refused to acknowledge virtual currency. The Reserve Bank of India in a press release in the year 2013, for the first time, stated that “Virtual Currency as a mode of transaction or payment cannot be authorized by the Central Bank or any other monitory authority.” The Reserve Bank of India warned people about the legal, financial, and operational risks involved in cryptocurrencies.
Although dealing with cryptocurrency was not advisable by the government until 2017, but, it was still legal to do so because no authority ever stated that it was illegal to do so. In the year 2017, the Reserve Bank of India declared that “We restate the remark made by us in 2013 and will continue to do so in the future!”
On 5th April 2018, the Reserve Bank of India issued a circular recognizing the drastic change in the payment industry as the price of metallic money had expanded. It suggested that banks around the world should consider cryptocurrency as a feasible alternative. However, this led to rising concerns about the protection of consumers and the risk of money being laundered. To this, the Reserve Bank of India opined that the organizations linked with the bank should not take into consideration or provide services to anyone dealing with cryptocurrency and those who are already dealing with them should stop immediately. Again, there was no clarity on the part of the Reserve Bank of India on the legal status of virtual currency in India.
In January 2020, the Reserve Bank of Indiadid not ban the trade of cryptocurrency but had only cautioned and banned entities like banks from dealing with the same.
In the same year, the Supreme Court of India held that banning cryptocurrency was unconstitutional which means the Supreme Court had legalized trading with cryptocurrency in India. However, there was no express mention of the same.
CURRENT LEGAL STATUS
Presently, India does not have any specialized legislation concerning cryptocurrencies. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was proposed by the government. However, the viewpoint of the government remains unclear. If passed, it will be an initial step towards the regulation of blockchain technology in a developing country like ours.
According to the budget for the financial year, 2022-23 presented by the Finance Minister Smt. Nirmala Sitaraman on 11th February 2022, any income earned through the trade of cryptocurrencies or the exchange of any digital assets will be taxed at 30 percent starting from the 1st April 2022. The 30 percent tax was considered justified as cryptocurrency is a speculative transaction and there already was a tax of 30 percent on speculative transactions.
It was also informed that decisions on what is lawful in regards to cryptocurrency are under consultation. Finance Secretary T.V.Somnathan stated that dealing in cryptocurrency is not illegal in India. However, it will never become a legal tender. The Government will not be responsible for any loss suffered by the people.
The Government of India and the Reserve Bank of India have proposed to launch their digital currency by the year 2024 which will use blockchain technology and the digital rupee will be regulated by the Reserve Bank of India. Somnathan said, “Money will be of the Reserve Bank of India but the nature will be digital. This digital rupee will be the legal tender. We can buy non-digital assets with this digital rupee like we buy things using our wallet or payments through UPI platform.”
WHY ARE THE INVESTORS UNHAPPY WITH THE 30 PERCENT TAX?
The imposition of the 30 percent tax has certain cons:
1. The prime concern for investors is that paying 30 percent tax means one percent TDS. This will affect volumes as it will be deducted on every payment made for the transferof a virtual digital asset. TDS compliance will be a trouble for the buyers as taxpayers may have thousands of items.
2. The government is not clear on the TDS compliance process for cryptos. Usually, there are penalties for non-compliance with TDS. The question remains unanswered as to whether this is also applicable to cryptocurrency.
3. It is also unclear whether the tax would be applied retrospectively. So, the investors have raised questions like, whether the gains made by them in the past years would also be taxed?
4. The question that is alsoraised is about the losses incurred by the investors in the past. Would they be carried forward? The government has stated that the losses cannot be set off but experts have opined that if the application of the tax is not retrospective then losses from the previous years can be technically carried forward.
5. Some Chartered Accountants have interpreted that crypto losses can be set off against crypto gains in the same year.
6. There is also no answer to, whether investors who traded cryptocurrencies for other crypto assets without converting back to fiat or Indian Rupees (INR) will also face the 30 percent tax?
7. Experts are also concerned about how exactly the tax is computed from April to April.
8. There is also clarity needed from the government on two prime issues:
i. How will crypto swaps be taxed?
ii. How will taxes be imposed on the transactions on international exchanges?
9. There are chances of small investors avoiding taxes by getting into peer-to-peer or P2P transactions through decentralized exchanges. Tracing these transactions would be difficult or almost next to impossible for the government.
10. Many experts have stated that the tax will also affect intra-day traders. Withholding the one percent will make day trading, arbitrage trading, margin trading, etc unworkable impacting the volume on crypto-exchanges thus making the markets inefficient.
WHAT KIND OF TRENDS CAN BE EXPECTED IN 2022?
In the present year, more ideas concerning virtual currencies are expected to go a long way. Decentralized blockchains are less expensive, faster, scalable, and long-term. Although Bitcoin’s dominance in the market is triggering the experts, it is a learned fact that its trade volume is also dwindling. Quality initiatives like Ethereum, Solana, and others have hyped the market’s curiosity like never before.
Since the interest in the field is quite increasing, certainty is anticipated by the experts. The Prime Minister of India, Shri Narendra Modi has called for the regularization of cryptocurrencies. Hence, we can expect prompt action.
Cryptocurrencies were created to design a decentralized currency system that would not be controlled by banks, financial organizations, or the government.
It is not wrong to say that India is dealing with cryptocurrencies in a legal grey area. It is currently taxed which explains the fact that it is not illegal to trade in cryptocurrencies in India. However, there is still a lot that has to be clarified by the government because even if it is not illegal it is still not considered a legal tender. There is a need for a system more stable for citizens so that they do not lose money while also not interfering in or controlling the market’s activity unduly.