India: Legality And Taxability Of Digital Currency In India

The Finance Minister of India in her Budget 2022 speech on 01.02.2022, announced a 30% tax on income from virtual digital assets and a TDS on payment made in relation to the transfer of virtual digital assets at 1% above a monetary threshold. While Indian crypto investors have welcomed the government's decision to tax profits from digital assets' transactions, even as the tax rate is a steep 30%, underscoring hopes the pending crypto bill will regulate the market rather than ban private coins completely. While the government and a few members of RBI's central board have sought a more nuanced view on digital assets, keeping in mind the technological developments, the RBI still favors a complete ban on crypto-currencies. It has made that explicit in repeated messages highlighting concerns relating to macroeconomic and financial stability from virtual currencies, the challenge of exchange management, monitoring and regulating such assets.

The Finance Minister explained that a currency can be defined if it is issued by the central bank by saying "I said the Reserve Bank will be issuing a digital currency a currency is a currency only when it is issued by the central bank even if it is a crypto. But anything which is outside of that loosely all of us refers to be cryptocurrency but they are not currencies,"¹ she said when asked about cryptocurrencies. She clarified that what the RBI issues in the next fiscal will be the digital currency and everything else apart from that are digital assets being created by individuals and the government will be taxing the profit which is made during transactions of such assets at 30 percent. The term "virtual digital assets" was introduced for the first time by way of an amendment to Section 2 by adding clause (47) in the Income Tax Act, 1961².

In the memorandum explaining the provisions in the Finance Bill, the government said that "Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets have increased substantially. Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly, a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill."³

In simpler words, a central bank digital currency (CBDC) is a legal tender issued by a central bank in a digital form. It is similar to a fiat currency issued on paper and similarly, interchangeable with any other fiat currency. While there are still concerns over the source, regulation, money laundering, terror financing, tax evasion and security of the nation over digital assets or crypto-currency, the ultimate goal of CBDC is to provide users with convenience and security of digital as well as the regulated, Reserve Bank backed circulation of the traditional banking system.

India planned to go public with its crypto bill twice last year and both times, the legislation never made it into Parliament for discussion even though it has been clarified by the Finance Minister that the long-awaited crypto bill is most definitely different from the 2019 proposal, which took a very hard stance against any kind of crypto activity, from the mining of crypto to trading.

From 2013 to 2017, the RBI issued various circulars warning the public against the use of virtual currencies about the potential financial, operational, legal, customer protection, and security-related risks they are exposing themselves to. But as the banks continued to allow transactions on cryptocurrency exchanges, on 01.02.2017, RBI released another circular reiterating its concerns with virtual coins. At the same time, two PILs were filed before the Hon'ble Supreme Court of India, one asking for a ban on buying and selling of cryptocurrencies in India and the other one asking for them to be regulated. This led to the prices of the crypto currencies falling, the exchanges freezing and withdrawals stopping once the order was passed. But still, there was no ban on digital assets or cryptocurrencies.

Meanwhile, in March 2020 a significant development took place. The Hon'ble Supreme Court of India in the case of Internet and Mobile Association of India v. Reserve Bank of India⁴, the court set aside the RBI notification dated 06.04.2018 on the grounds of proportionality. The judgment by the apex court was regarding the future of cryptocurrency in India, as the court highlighted that "In case the said enactment (2019) had come through, there would have been an official digital currency, for the creation and circulation of which, RBI/ Central Government would have had a monopoly."⁵

With about 100 million Indians owning crypto-currencies, according to a recent study by BrokerChoose, making India's crypto user base is bigger than any other country in the world. With investors taking to crypto with such gusto, the big question to ask is: is cryptocurrency legal in India? The answer to that question currently depends upon whether we are talking about owning crypto-currencies or hoping to use them as legal tender. With no legislature currently covering crypto-currencies in India does not make it illegal. It simply means that in the absence of a robust legislative framework, crypto owners may not be able to necessarily enjoy the same level of safeguards that owners of other asset classes do.

But saying that, even if the government recognizes crypto-currency as an asset, it is unlikely to accept it as legal tender in view of the comments and statements made by various senior officers of the Finance Ministry and the Reserve Bank of India. Virtual currencies, unlike traditional investments, do not have any cap on fluctuations. They can be influenced by the smallest of things and are very volatile. Yet, it has not failed to attract investors from across the globe and give a hefty return on their investments.

Countries across the globe are worried that this might just be another hoax that would make citizens lose a lot of their finances. Countries are constantly trying to regulate the sphere so that the market can be stabilized and there are proper indicators of the market movement. Crypto Currency was introduced with the intent to have a decentralized currency system that is not controlled by the banks, financial institutions or the governments but if countries across the globe decide to regulate this currency system, then that might adversely impact the very purpose behind introducing virtual currencies.

Footnotes

1. https://indianexpress.com/article/business/budget/crypto-tax-rbi-digital-currency-nirmala-sitharaman-union-budget-7751912/ (last visited on 21.02.2022)

2. https://www.indiabudget.gov.in/doc/Finance_Bill.pdf (last visited on 21.02.2022)

3. https://www.indiabudget.gov.in/doc/memo.pdf (last visited on 21.02.2022)

4. MANU/SC/0264/2020

5. Internet and Mobile Association of India v. Reserve Bank of India (MANU/ SC/0264/2020), para 6.171

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