There has been much discussion about the legality of cryptocurrency in India. The various actions taken by the Government of India lays down the clear intent of the authorities to provide a recognized legal status to cryptocurrencies. 

It began with the RBI coming out with a circular, restraining banks, NBFCs and payment system providers from dealing with virtual currencies and providing services to virtual currency exchanges. This resulted in crypto exchange platforms filing a writ petition in the Supreme Court; the ban was ultimately struck down in the case of Internet and Mobile Association of India v. Reserve Bank of India, where the Supreme Court declared the RBI circular unconstitutional. 

The latest amendment to Schedule III of the Companies Act, 2013 issued on March 24th 2021 states that from the new financial year, all companies will be required to disclose their investments in cryptocurrencies and also state any profit or loss involved in the transaction. The holder of any virtual currencies will also have to declare the number of holdings, details of deposit and advances from any person for the purpose of trading or investing in cryptocurrency. 

The Indian finance minister in the Union Budget 2022 announced that "any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent." Further, tax deduction at source at the rate of 1% has been proposed for transactions involving cryptocurrency. The minister also stated that taxation of a virtual digital asset does not imply the legal recognition of cryptocurrencies.  

Let's now examine the legal position of what can be taxed in India. The Income Tax Act does not differentiate between income earned legally or illegally. Hence, the Income Tax department can collect tax on all incomes. However, when the government is aware that income has been generated through illegal sources, it is under a statutory obligation to punish the perpetrators under various punitive laws, including the Indian Penal Code, Benami Transactions Act, etc. Since the government has not yet started criminal investigations against any investor, trader or service provider of cryptocurrency, it can be safely assumed that the government is tacitly agreeing that income earned from cryptocurrencies is legal income from a legal source. If the government were to decide otherwise and prosecute citizens dealing in cryptocurrencies, it is certain to open a proverbial Pandora's box for the government.  

The Indian Computer Emergency Response Team (CERT-In) on April 28th 2022 issued Directions under subsection (6) of section 70B of the Information Technology Act, 2000 relating to information security practices, procedures, prevention, response and reporting of cyber incidents for Safe & Trusted Internet (Cyber Security Directions of 28.04.2022).  

As per Cyber Security Directions of 28.04.2022, the virtual asset service providers, virtual asset exchange providers and custodian wallet providers shall mandatorily maintain all information obtained as part of Know Your Customer (KYC). It shall also maintain records of financial transactions for a period of five (5) years to ensure cyber security in the area of payments and financial markets for citizens while protecting their data, fundamental rights and economic freedom in view of the growth of virtual assets. If companies in the cryptocurrency sector have to maintain data for 5 years, it means such companies will need to exist for a further minimum period of five years. This in turn reveals the government's position of permitting cryptocurrencies and service providers of such currencies to exist.  

 These actions (as well as inactions) of the government are clear evidence of the fact that the Government of India may have permitted de facto approval of cryptocurrencies and the dealing/trading of them.

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