Cryptocurrency

CRYPTOCURRENCY: AN OVERVIEW

  • BACKGROUND

Ever since the evolution of virtual currencies (“VCs”) in 1980s, a continuous rise in the popularity and prevalence of the VCs has been seen around the world. Many consider waning trust in governmental institutions, a major cause of ongoing worldwide financial revolution. Cryptocurrency is a kind of VC, which is used as a medium of exchange for “peer to peer” (people to people) transactions. Unlike fiat currency, such transactions are “decentralized” and not controlled or regulated by the government or centralized banks.    

  • TECHNOLOGY BEHIND CRYPTO

 Blockchain Technology or Distributed Ledger Technology (“DLT”) is used to facilitate the decentralized platform for cryptocurrency. On DLT, the user’s data is recorded on a ‘blockchain’ or ‘distributed ledger’ and is made publicly accessible to all users. Each digital transaction is authenticated by consensus of majority of users on blockchain. This distributed consensus mechanism allows users to remain aware about each and every transaction, thereby builds trust among the participants. It is pertinent to note that identity and privacy of digital assets and users is not compromised by use of DLT. Further, the prefix ‘crypto’ denotes the use of asymmetric cryptography to secure and verify such transactions from fraud and external interventions. The user’s data is recorded on a ‘blockchain’ or ‘distributed ledger’ and whenever a new data (or new transaction) is added to the block chain or ledger it is made publicly accessible for users.

  • LEGALITY

One of the major challenges faced by cryptocurrency is governments’ constant intrusion and suspicion on trading of cryptocurrency. Although, the legal status of cryptocurrency varies from country to country – countries like the US, Canada, EU have legalized the trading in virtual currency. However, countries such as China, Turkey, Bangladesh, India etc. have either banned or are anticipating to ban the use of cryptocurrency as a form of payment. Despite legal and regulatory uncertainty, the investment in cryptocurrencies has been constantly increasing. Indian investment in cryptocurrency ranks at 11 out of 154 countries in the world[1]. In May 2021, investment in VC grew from $923 million (in April 2020) to enormous rise of $6.6 million[2].

  • INDIAN PRESPECTIVE

Indian government and regulatory authorities have been reluctant towards usage or trading of cryptocurrency. Following steps have been taken by the government and other authorities in this regard:

  • RBI Press Releases:

Reserve Bank of India (“RBI”) vide its cautionary press release dated 24 December, 2013[1], warned the users, holders and traders of VCs (such as Bitcoins, lite coins, BBQ coins, dogecoin) about the potential financial, operational, legal, customer protection and security related risks.

  • RBI Issued Directives advising Payment System Providers:

RBI vide circular dated 06 April, 2018 namely ‘Prohibition on dealing in Virtual Currencies (VCs)’, (“RBI Circular”) issued directives to Payment System Providers/Institutions to stop doing business with cryptocurrency exchanges. It however, did not stop and/or comment on the public owning cryptos.

  • Supreme Court Ruling on the RBI Directive on Cryptocurrency:

The Hon’ble Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India[2], struck down/set aside the directive issued by the RBI on VCs on the ground of ‘Doctrine of Proportionality’, observing that – ‘While we have recognized …., the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities (VCs). But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.

Therefore, in the light of the above discussion, …… the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality’.

  • Proposed Framework for Cryptocurrencies:

The Parliament has proposed to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“New Bill”) in winter session of Parliament. The new Bill will provide a framework for the creation of official digital currency as legal tender in India. It also seeks to prohibit all private cryptocurrencies. However, it allows certain exceptions to promote the underlying Blockchain Technology of cryptocurrency and its uses.

  • Budget 2022:

The Financial Bill 2022 proposes to put 30% tax (the highest tax band in the Country) on any income from transfer of any Virtual Digital Assets (VDAs) i.e. cryptocurrency applicable from 1 April 2022 onwards. The highest rate of 30% tax is regardless of the holding term, bringing VDAs on par with gambling and betting.

Except for the expense of acquiring digital assets, no deductions will be allowed. Losses on the sale of these digital assets cannot be offset against other sources of income. Further, TDS of 1% will be charged if the threshold is exceeded. However, the Finance Bill exempts ‘specified persons’ (individual or HUFs) having turnover/gross receipts within a specified threshold from the obligation of TDS. For cryptocurrencies given as gifts, the tax will be incurred by the recipient.

People who do not have a PAN Card will no longer be able to trade in these VDAs. As a result of the TDS, the KYC aspect has now become essential.

The move to impose the highest tax band on VDAs by the government is done to deter people from entering the space. However, despite speculation about a cryptocurrency ban, a defined tax regime is a step toward the government’s acknowledgment of cryptos.

  • DA LAW COMMENTS

As of now, it is not certain how the Indian government will regulate the cryptocurrencies. The New Bill intends to prohibit all private cryptocurrencies. Consequently, the whole idea behind the decentralization of currency may go in vain.

Interestingly, the government has proposed to introduce digital currency. Which essentially translates to rupee in an electronic form, that can be used in contactless transactions. The Central Bank Digital Currency (CBDC), RBI’s digital currency may be introduced in 2023.

Despite this, the Supreme Court’s observation that there must be empirical data to justify the ban on cryptocurrency cannot be overlooked.

In parting, seemingly cryptocurrencies will not be treated as legal tender in India any time in the near future. However, the value of cryptocurrencies depends on the eye of the beholder. Since stakeholders think it is valuable, it is valuable.

  • SOME PERTINENT QUESTIONS FROM TAX EXPERTS –

Q. Why despite Tax being imposed on cryptocurrency, it has not been classified/legitimized as a legal asset?

Q. Applicability of tax on cryptocurrency mining, airdrop?

Q. If an investor has mined crypto, then could the cost of the mining setup be set off against the sale of cryptocurrency?

Q. Applicability of the proposed scheme whether prospective or retrospective for the purpose of set-off up till April 2022?

Q. Since the identity of the Seller is not known to the Buyer, on whom the TDS payment obligation befalls?

Q. How do you deal with taxes on international exchange transactions and which are not registered within the country?

Q. Would TDS be deducted if a person transfers crypto to themselves from one exchange in India to another exchange in India?

Q. Whether taxes can be avoided by performing peer-to-peer or P2P transactions that requires going through decentralized exchanges and which would render it difficult or impossible for the government to track the transaction?

Q. Whether the exemption to Specified Persons (Individuals/HUFs) be used as an impasse by Whales permitting fraudulent transfer of the VDAs?

*“The content of this Article does not necessarily reflect the views/opinions/position of Dhwaj & Associates but remain solely those of the author(s). We would be pleased to know our readers comments/opinions on above questions and for any further queries or follow up please contact Dhwaj & Associates at info@dalaw.in

 

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