Introduction & Background
Crypto assets are a part of the crypto industry which came about in recent years and includes crypto assets such as the cryptocurrencies like bitcoin, dogecoin, Ethereum, etc. along with other crypto assets like NFTs (Non-Fungible Tokens) which are essentially digital art or media pieces sold on the digital market. These assets are secured by cryptography, which means faking them or making counterfeit copies of them is near impossible. These work on decentralized networks based on blockchain technology, essentially meaning no one country has sovereignty over the virtual marketplace where they are sold and their transactions in the digital space. What this means is that these assets are not issued by any central governmental authority, meaning they are free of interventions by any state legislation. The blockchain, in brief, is a digital ledger created by a massive network of computers operating from different locations throughout the globe.
Now, the emergence of crypto assets is a whole new industry that has, as its main focal point, trading on a deregulated platform via the use of blockchain technology. This essentially means, no one country can take responsibility to regulate the transactions in crypto assets that happen over the blockchain. For this reason, currently, there is no legal framework to govern crypto assets. Instead, because of this absence of control and authority over the crypto market, the RBI has previously issued circulars trying to deter the general population from partaking in these blockchain transactions involving crypto assets as any dispute arising out from these transactions would be out of the jurisdiction of any courts in India. In the year 2018, the RBI via a circular published on 6th April 2018, banned the financial institutions regulated under it, from dealing in crypto assets. However, this RBI circular was set aside by the Supreme Court of India, on the grounds of proportionality which included the lack of any discernible damage caused to the financial entities being regulated by the RBI, by an order dated 4th March 2020 when several petitioners challenged the constitutionality of the RBI circular in the SC.
The Cryptocurrency Bill 2019
In July 2019, the draft bill, the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019 (the Cryptocurrency Bill 2019) was released which aimed at banning the activities of mining, generating, holding, selling, dealing in, issuing, transferring, disposing of or using cryptocurrencies in India. But on the contrary, the Bill provided for the introduction of a digital Rupee as a legal tender which would be applicable in both Indian and foreign jurisdictions. The Bill, however, exempted from its bans, the study of the underlying technology for research or education purposes while banning the rest, non-conformity to which would attract a penalty of imprisonment of up to 10 years. The number of Indian investors in the crypto market was increasing day-by-day and because of that, the stakeholders of the cryptocurrency market started to raise their concerns regarding the intention of formulating the draft Bill. The Steering Committee was constituted in the same year for the purpose of making the fintech regulations more flexible so as to enhance the spirit of entrepreneurship. The Committee in its report, stated that most of the cryptocurrencies are made outside India and a large number of Indian citizens are investing in it. Because of the crypto assets arising out of India, there are a number of legal issues and hurdles concerning the trading of these assets. Due to these regulatory issues, its legalization as a currency is a problem in India. Also, the Committee found out that since these cryptocurrencies do not have the essential features of any regular currency, they will not be able to permeate the regular currencies market and become one. Also, these cryptocurrencies pose the threat of being misused and are generally regarded as being volatile and unsafe investments.
The Cryptocurrency Bill 2021
As the Bill of 2019 faced backlash by the stakeholders of the crypto economy and the findings of the Steering Committee of 2019, another draft Bill was being worked upon which was the Cryptocurrency and Regulation of Official Digital Currency Bill of 2021 (2021 Bill). The main purpose of this 2021 Bill was to create a proper legal framework for the insertion of the official digital currency which was to be issued by the RBI and to completely restrict all the other different crypto currencies. Later on, a Parliamentary panel discussion was held in this regard discussing the topic of crypto finance, whereby a consensus was reached that the crypto assets needed to be regulated instead of completely banning them. After this Parliamentary discussion transpired, the Bill of 2021 was listed in the Lok Sabha on March 24th, 2021. Apart from this, the Ministry of Corporate Affairs also released a notification obligating the companies dealing with cryptocurrencies to make disclosures regarding the cryptocurrency transactions done by them in a financial year.
The Financial Budget, 2022
The relevant portions of the Financial Budget of 2022 include the taxing of digital assets which includes in its definition, crypto assets. These crypto assets were to be taxed at a rate of 30% on the transactions. The Budget had also proposed a 1% tax deduction at the source on the payments made relating to the purchasing of the crypto assets. These proposals were implemented by the Income Tax Act of 1961 as part of an amendment made by a new regime set up by the Finance Act of 2022. As the Financial Budget of 2022 was released, the Finance Minister informed the citizens that any gift of crypto assets was also proposed to be taxed at the hand of the recipient, or the person or entity who gets the asset. This is one of the first steps toward the regulation of crypto assets in India.
Amendments to the Income Tax Act, 1961
The RBI, as per the new regime set up by the Finance Act of 2022, released a circular, which amends the Income Tax Act of 1961 (Tax Act). This amendment mainly entailed the insertion of a new Section 194S in the Tax Act, which was to be effective from 1st July 2022. This amendment, for one, mandates that any person who is responsible for the payment of any resident consideration for the transfer of crypto assets, shall, at the time of credit of such consideration to the account of the resident or at the time of payment, deduct an amount equal to 1% of such consideration as Income Tax. The tax is exempted from the deduction in case the consideration is payable by a specified person and the value or aggregate value of the consideration does not surpass the limit of Rs. 50,000/- during a financial year or if the consideration is payable by any person who is not a specified person and the value or the aggregate value of the consideration does not surpass the limit of Rs.10,000/- during a financial year. The amendment also introduced the tax cut of 30% and the 1% tax deduction at source as discussed in the Financial Budget, 2022 section of this Article.
Conclusion
The current Finance Minister, on 18th July 2022, clarified the stand of the government on crypto assets. The Finance Minister, while replying to a query from a Lok Sabha MP, stated that cryptocurrencies are, by their inherent nature, borderless and attempting to abolish or regulate them would entail an international collaboration so as to prevent any sort of regulatory arbitrage. In essence, India cannot arbitrarily ban or regulate crypto assets without consultations and discourse on the topic with other countries as it is a matter of global importance. In this regard, the Finance Minister clarified that the proposed 2021 bill has been removed from further deliberations till discourse on a global level is achieved and a consensus among multiple countries is reached.
References
Cryptoassets & Blockchain 2023 (azbpartners.com)
Blockchain & Cryptocurrency Laws and Regulations | India | GLI (globallegalinsights.com)
Report of the Steering Committee on Fintech Sep 2019.pdf (investindia.gov.in)
Cryptocurrency Explained With Pros and Cons for Investment (investopedia.com)
Cryptocurrency in India: One Step Forward, Two Steps Back – Lexology
Understanding the current state of crypto assets in India | Mint #AskBetterQuestions (livemint.com)