India’s Latest Development on Crypto-Currencies
- Cryptocurrency is a type of digital asset that is created to serve as a medium of exchange and secure financial transactions, with the use of secure cryptography.
- Instead of having a centralised digital currency and banking system, cryptocurrencies work with decentralised control. This decentralised control works with the help of distributed ledger technology, known as the blockchain, that will be a public financial transaction database.
- Bitcoin was considered the first decentralised cryptocurrency, launched as open-source software in 2009. After the release of Bitcoins, over 4,000 other variants of bitcoin, and other cryptocurrencies have been introduced.
- Regulations on cryptocurrencies depend on country to country. And the trading process is regulated differently by the financial authorities of these countries. In India, there is very no clarity upon the recognition of the same.
- Indian investors have looked towards Bitcoins in a very positive way and have included it in their investment portfolios since its inception in 2009. However, the Reserve Bank of India is providing no clarity on the recognition of cryptocurrency in India.
- It considers cryptocurrencies to be something that people are inclined to based on their self-interest. However, after attaining great highs in 2018, RBI could not keep up with their stance after that.
- After looking at the global trends related to cryptocurrency, the Supreme Court was forced to reverse its decision related to banning on crypto-asset trading in March 2020.
- Thus, in the recent updates, the RBI is not banning virtual currencies. Also, the government had set up two committees to present their views, and due to contradicting remarks by both the committees, the Supreme Court was forced to reverse its decision.
- At present, bitcoins and other cryptocurrencies allowed Indians to participate in the global ecosystem. As a result, the Indians can make simple, quick, and cost-effective transactions in Bitcoins and other cryptocurrencies.
- Even though almost every investment market crumbled during the pandemic and lockdown times, the cryptocurrency market performed quite steadily and achieved greater heights. It also resulted in the creation of new job opportunities and helped employees retain their employment.
- After looking at the world perspective, it’s time for the RBI, SEBI, and the government to come up with some regulatory policies and calibrate frameworks to have technological advancements.
CRYPTOCURRENCY IN BUDGET 2021
- Considering the recent cyberattacks, the following regulatory standards were required to be addressed in Budget 2021 in relation to cryptocurrencies.
- Regulation regarding the flow of money in crypto transactions.
- Identifying and making laws in relation to rights, duties, and offences.
- Penalties are to be imposed for each identified offence.
- Recognising cryptocurrencies under commodity trading in India.
- Provisions related to the application of direct and indirect taxes.
- Keeping proper monitoring over the employments under blockchain technology.
- The RBI believes that though there are no defined laws around cryptocurrency trading in India, it was made legal.
- In a recent development, the government is looking to come up with a bill that will explicitly ban all private cryptocurrencies. Such a move has been initiated as the Central Bank believes that these private entities are playing with the currencies and this can potentially hamper the country’s financial sector.
- As part of implementing the ban, the Lok Sabha is looking to frame ‘The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’, which address the following points
- The need to create a framework for developing of an official digital currency issued under RBI.
- Prohibit all kinds of investment in private cryptocurrencies in India.
- However, on the positive side, the said bill has the potential to launch digital currencies under the control of RBI and also to build an ecosystem for growth in India. This will facilitate legal support for digital currency in India.
RBI GUIDELINES TO BANKS IN INDIA
- Considering the speculative boom seen in the cryptocurrency market since the pandemic, the Indian central bank has issued certain advisories to its lenders to cut ties with the crypto exchanges.
- With the increasing number of investors in the crypto market, the regulators are looking to launch some more of them. It is believed that in India there are 10 million crypto investors, with a total exposure of Rs.100 billion.
- The regulator is unofficially is instructing the banks not to engage in crypto transactions since they are highly speculative in nature. The RBI believes that a massive amount of money flows out of the country as a part of crypto transactions, which in return, might encourage money laundering.
- Although, RBI has not issued any formal order providing the restriction, however, the banks, after receiving the informal order, is looking to restrict the orders of the regulator.
- As a result, the crypto exchanges are struggling to find a new banking partner. Many private sector banks have made policies for restricting exposure to the cryptocurrency market, while some are implementing internal policies and risk measures to avoid transacting with crypto exchanges.
BANKS IN INDIA TO RESUME CRYPTOCURRENCY
- The RBI through its notification on May 31, 2021, stated that banks and other regulatory entities shall not cite RBI’s April 2018 order on virtual currencies, debarring banks from facilitating transactions in cryptocurrencies.
- The RBI provided this clarification after HDFC Bank and SBI warned their customers not to deal in bitcoins and other virtual currencies, by citing the RBI 2018 circular.
- They also sent emails to customers, providing that failure to comply with their warning could lead to the suspension of their credit cards and accounts.
- Some of the Top banks informed Indian cryptocurrency exchanges that they will discontinue the cryptocurrency trading services.
- RBI, after the revision of judgement by the Supreme court, instructed the banks to carry out due diligence processes of customers in line with the government regulatory standards in respect of KYC (Know Your Customer), AML (anti-money laundering) and CFT (Combating of Financing of Terrorism) and also under the PMLA (Prevention of Money Laundering) Act, 2002.
- Also, the banks are required to comply with the provisions of FEMA (Foreign Exchange Management Act) in relation to remittances made by overseas investors.
- The Supreme Court after the revision of their judgement instructed the RBI not to impose any restrictions on the trading of cryptocurrencies. This would amount to an interference with the fundamental rights of citizens.
RBI CIRCULAR REGARDING CRYPTO INVESTORS IN INDIA
- As discussed above, there are 1.5 crore people in India investing more than Rs 15,000 crore in the cryptocurrency market. Though investors are facing problems due to the lack of support from banks, they are still looking positive in continuing investment.
- The sceptics of cryptocurrency believe that the Government shall soon ban crypto trading in India.
- It is also expected that the Government might soften their views on cryptocurrencies by focusing on regulation and taxation rather than banning these currencies. As millions of investors are putting their money in cryptocurrencies, the Government might look to regulate to offer security to these investors.
CRYPTOCURRENCY UNDER INDIAN INCOME TAX LAW
- There is no clear provision provided in Indian Tax laws for defining the taxation of crypto assets, which has resulted in various ways of interpretations by the chartered accountants in respect of the taxation rules.
- Income earned from crypto trading is not considered normal income. Instead, it shall be treated as a capital gain, and the provisions related to capital gains on the profits earned from the sales of a moveable or immovable asset shall be applicable on crypto profits.
- Another thing to consider is that capital gains tax rates are subject to the holding period of the asset, which implies that the period of holding of the cryptocurrency will determine the rate of tax to be applied on them. Thus, where an individual has an annual income of more than 10 lakh, they will be charged a tax of 30% for short term crypto earnings and 20% for long term crypto earnings.
- Also, in case any person undertakes mining of cryptocurrency, the same shall not be treated as a capital asset. Such an income earned, will then be considered as ‘income from other sources and taxed accordingly.
GST ON BITCOIN
- The government is looking to impose Goods and Services Tax (GST) on Bitcoin transactions @18% and it is expected that these regulations will provide an annual revenue of Rs.7,200 crore to the government.
- The Central Economic Intelligence Bureau (CEIB) has submitted a proposal before the Central Board of Indirect Taxes and Customs (CBIC) to levy GST on Bitcoins transactions whose annual trade value in India is approximate Rs.40,000 crore.
- For this, the Bitcoins be classified as an intangible asset and the GST be levied on the margins made in the trading transactions undertaken on Bitcoins.
- Though there is no government regulation regarding cryptocurrency transactions, miners and their exchanges.
- The members of India’s top Bitcoin exchanges, including Unocoin, Zebpay, Btcx-India and CoinSecure, approached the Authority for Advance Ruling (AAR) for clarifying the uncertainty hovering around them.
- As per the proposal drafted by the GST Council, the cryptocurrency ‘mining’ would be termed as a supply of service and they will have to pay tax on transaction fees or remuneration received. Where the incentive amount exceeds Rs.20 lakh, individual miners will be required to register themselves under GST.
MCA MANDATES REGARDING CRYPTOCURRENCY DISCLOSURES
- To bring transparency and regulate cryptocurrency dealings in India, the Ministry of Corporate Affairs mandated companies to disclose all transactions in cryptocurrencies or virtual currencies in their balance sheets, since cryptocurrency is termed as a digital asset used as a medium of exchange for goods and services.
- As per the latest notification, where a company undertakes trade and investment in cryptocurrency or virtual currency during a financial year, they are required to disclose the profit or loss on transactions involving cryptocurrency or virtual currency.
- The new notification by the MCA thereby clarified the ambiguity regarding cryptocurrencies. Investors are put to ease, after knowing that the government will regulate transactions and taxation on cryptocurrencies.
- Besides the new rules on disclosure related to dealings in cryptocurrencies, the new MCA notification mandated companies to disclose details relating to corporate social responsibility and details of Benami property held by them in their financial statements from the coming financial year.
- Other disclosures include the deeds of immovable properties that are not held in the company’s name, loans and advances granted to promoters, directors, KMPs and other related parties, and also the relationship with struck-off companies, etc.
SEBI REGULATION OVER CRYPTOCURRENCY EXCHANGES
- Cryptocurrency exchanges are asking the government to appoint the Securities and Exchange Board of India (SEBI) or any new entity, as the regulator of the operations of the crypto industry in India.
- It is believed that the SEBI, being a capital market regulator, would be a more appropriate body to monitor the cryptocurrencies than the Reserve Bank of India (RBI).
- The exchanges believe that the crypto assets somehow resembles the commodities as compared to currencies. Thus, the SEBI is seen as an ideal regulator.
- The cryptocurrency exchanges also propose to have a new entity for this purpose which could be a hybrid body under both RBI and SEBI.
- The cryptocurrency market has been volatile over the last few days due to various reasons.
- The restriction of trading in cryptocurrency by the Indian banks has set panic among the investors of India’s top Bitcoin exchanges, including Unocoin, Zebpay, Btcx-India and insecure.
- The investors are neither able to invest nor withdraw their hard-earned money. Some cryptocurrency exchanges have also been forced to stop accepting deposits denominated in rupees.