The Legality of Crypto Currency in India in Light of the Judgements and Legislators


Posted On : November 17, 2022
The Legality of Crypto Currency in India in  Light of the Judgements and Legislators
This article mainly focuses on the meaning and methods of managing Cryptocurrency, which is one of the most spoken of digital currencies in the world. A brief introduction to how cryptocurrency can be bought, stored and sold can be understood here. It concentrates more on Virtual Digital Assets and the provisions for the same under Income Tax Act, 1995. A brief overview of parliament’s stand on laws regarding virtual currencies can be seen in this article. The judiciary has also taken its stand on the digital transactions system in 2020 and the case which led to the particular landmark decision is discussed in brief.
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Table of Contents

Introduction on Cryptocurrency

A cryptocurrency is an encrypted data line that denotes a part of the value of an authoritative currency. It is monitored and organized by a peer-to-peer network called a blockchain, which also acts as a secure ledger of transactions, for example, buying, selling, and transferring. It is designed to work as a medium of exchange, where individual ownership records are placed in a computerized database.  People don’t have to rely on banks to verify transactions. It’s an open system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions for the exchanges. 


Although the first cryptocurrency Bitcoin was founded in the year 2009, there are several other types of cryptocurrencies available in the financial market now. If anybody is new to the concept of cryptocurrency and is interested in investing in it, there are certain things they should know and follow. Firstly, they should know to buy the cryptocurrency and later its management comes into the picture. There are some steps that need to be followed to buy cryptocurrency safely. The steps are as follows:

  1. Choose a platform: Primary step is choosing the platform and you can choose between a traditional broker or a dedicated cryptocurrency exchange. When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.
  2. Funding your account: The next step after choosing a platform is to fund your account so that you can start trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.
  3. Placing an order: An order can be placed via the crypto exchange’s web or any other mobile platform availing the same set of services. These include payment services like PayPal and Cash App which allow users to buy, sell, or hold cryptocurrencies.
  4. Storage of cryptocurrency: Different service providers provide different ways to store your purchased crypto. Majorly used terms are “hot wallet” and “cold wallet”.
  • “Hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
  • “Cold wallets” rely on offline electronic devices to securely store your private keys.


By keeping these basic aspects in your mind, a person who is willing to involve himself in crypto transactions should also know that he cannot use cryptocurrency on every materialistic transaction. The number of institutions accepting cryptocurrencies is growing, but large transactions involving it are rare. Despite of some disadvantages, it is possible to buy a wide variety of products from e-commerce websites using cryptocurrency.

The procedures involved in a cryptocurrency transaction are fairly complex, technical processes, but the result is a digital register of cryptocurrency transactions which is hard for hackers to play with. Considering that, the legislators cannot maintain the silence on this most emerging and interesting field of digital transactions. To regulate the functioning of cryptocurrency, a much-needed and exclusive enactment is to be made and passed by the parliament as it is the need of the hour.


Virtual Digital Assets (VDAs)

Section 2(47A) of Income Tax, 1995 defines “Virtual Digital Assets”. It means:

(a) 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 reprealsentation 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;

(b) Non-fungible Token (NFT) or any other token of similar nature, by whatever name called;

(c) Any other digital asset, as the Central Government may, by notification in the Official Gazette specify.

In simple words, the virtual digital asset shall mean a cryptocurrency, NFT or another virtual digital asset as notified by the Central Govt. It will not cover subscriptions to any OTT platform, mobile applications, e-commerce platforms, etc. The Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of a virtual digital asset subject to such conditions as may be specified therein. Such powers might have been given to the Central Govt. to exclude India’s first digital currency or Central Bank Digital Currency (CBDC).

In view of Section 2(14) of the Income-tax Act, a capital asset means property of any kind held by a person, whether or not connected with his business or profession. The term ‘property’ signifies every possible interest that a person can acquire, hold, or enjoy. Therefore, cryptocurrencies or NFTs should be deemed capital assets, if purchased as a form of investment by the taxpayers. Therefore, any gain arising on the exchange of such assets shall be taxable as capital gains. However, if the transactions in such assets are frequent, it should be held that the taxpayer is ‘trading’ in such assets. In such scenarios, income from the sale of those assets should be taxable as business income and India is now concentrating on ways to enforce taxing systems on VDAs.


Tax Benefits Arising out of Section 56(2)(x) of the Income Tax Act, 1995 on Movable Property

The deemed income under this provision can arise from the following transactions:


(a)  Where any property is received without consideration and the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property will be chargeable to tax.


(b)  Where any property is received for a consideration that is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the difference between fair market value and consideration is chargeable to tax.


In both situations, the limit of Rs. 50,000 shall be checked for every transaction and not in aggregate of all transactions.

This provision is applicable to any property in the nature of shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art. Where the transaction involves any other movable property, excess of consideration over the fair market value shall not be chargeable to tax.

The Finance Bill, 2022 proposed to include virtual digital assets within the scope of movable assets. Thus, after the amendment, Section 56(2)(x) shall apply to the following immovable properties:

   (a)  Shares and securities;

   (b)  Jewellery;

   (c)  Archaeological collections;

   (d) Drawings;

   (e)  Paintings;

   (f)   Sculptures;

   (g)  Any work of art;

   (h)  Bullion; and

   (i)   Virtual Digital Assets.


Thus, if a person receives a virtual digital asset without consideration (gift) or for inadequate consideration and the value of such benefit exceeds Rs. 50,000, it shall be taxable in the hands of the recipient under Section 56(2)(x) as income from other sources.

The value of the benefit arising under this provision shall be taxed at the rate applicable to the assessee. Such income shall not be taxed at 30% under Section 115BBH of the Income Tax Act, 1995 because it does not arise due to the transfer of a virtual digital asset. However, when the recipient further transfers such assets, the resultant gains shall be taxable under Section 115BBH.


Parliament on VDA’s and Cryptocurrency

On November 23rd 2021, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced to the Lok Sabha with the objective 'to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India and to prohibit all private cryptocurrencies in India, with some exceptions.’ Due to some lack of technicalities and intricacies involved in the concept of Cryptocurrency and India’s backwardness in the development of digital currency, the bill has not been passed by both the houses of parliament. In India, the Crypto trading platforms are witnessing a substantial jump in volumes. As per a recent report, India's biggest Cryptocurrency exchange registered an annual trade of over $43 billion. If properly regulated, the Government can tax the revenue generated, which can be a win-win situation for both the Government as well as investors. And in order to regulate such revenue and tax matters, the government will need recommendations from experts from all over the world.


The Role of Judiciary in the Matters Relating to Virtual Currencies


In the case of Internet and Mobile Association of India vs Reserve Bank of India [W.P (Civil) No. 528 of 2018], The RBI circular was challenged before the Supreme Court of India by the Internet and Mobile Association of India, seeking a direction to the respondent not to restrict banks and to the other financial institutions from providing access to the banking services and transactions that are linked with virtual currencies.


In India, RBI is the central banking institution that regulates the currency in order to secure monetary stability in India and it was nationalized on 1st July 1949. In June 2013, through the report of Financial Action Task Forces, RBI caught on to the growth of virtual currencies because of the excessive use of online mobile technology.

On 24th December 2013 press release issued by RBI clarified that the creation, trading, and usage of Virtual Currencies as a medium of exchange is not authorized by the Central Bank or monetary authority. RBI issued a circular “statement policies” on 6th April 2018 on Developmental and Regulatory policies in exercising of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45 JA and 45 L of RBI Act, 1934. Paragraph 13 of the circular prohibited banks and other entities regulated by it from dealing in virtual currencies and to existing relationships with such persons or entities, if they have already provided any services related to virtual currencies. This circular was based on RBI’s concern that virtual currencies were prone to hacking there could be speculations on the account of there being no underlying assets and a resultant violation could lead to a significant loss. It was observed that the use of virtual could potentially lead to money laundering and terrorist financing. The effect of prohibition was that the exchange through which virtual currencies were traded could no longer maintain and operate bank account thereby putting end to the business of virtual currencies. Relevantly, RBI directed the bank not to maintain accounts or give loans against virtual currencies. Accepting virtual currency as collateral and transfer or sale on purchase of virtual currencies was also prohibited. This was challenged before the Supreme Court of India.

On 4th March 2020, The bench constituting of Justice Rohinton Fali Nariman, S. Ravindra Bhat, V. Ramasubramanian of The Supreme Court held that the Circular was unbalanced on the grounds that none of the RBI’s controlled elements had ‘endured any misfortune or unfavorable impact straightforwardly or in a roundabout way, because of the interface that the VC trades had with any of them. Furthermore, by depending on the administrative methodologies in other purviews, the Court held that there were elective administrative methods through which the RBI might have accomplished its expressed targets. The push of the Court’s decision in such a manner was that guideline would be a more proportionate reaction than disallowance.


By interpreting the Banking Regulation Act, 1949, Payment Settlement Act, 2007 and The Reserve Bank of India Act, 1934, the apex court decided on this case and held that the guidelines issued by RBI that direct the banks to stop dealing or providing services to the entities trading in cryptocurrency are unenforceable.


Conclusion

Considering all the recent developments in virtual currencies and the involvement of a large number of people in all such transactions, it definitely makes way for a lot of uncertainty and ambiguity relating to the laws of cryptocurrency. The only way through which the procedure can be regulated is by passing strong legislation that can monitor all the matters regarding the purchase and sale of virtual currencies, especially cryptocurrency. The legislation will certainly take time to frame the laws and set it up efficiently, but it will definitely be worth it. 


Written By:
Anik

Anik

Bangalore

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