Introduction & Background
A cryptocurrency is a form of virtual currency based on the technique of ‘Cryptography’. The concept emerged in 2009 as bitcoins, but it has gained popularity in recent years only. It is an example of the advancement of technology. Now, it is recognized as a modern way of investment. Individuals, corporate entities, etc., are investing in it. This concept has been adopted in many countries. But it has not flourished in India. This is because the Reserve Bank of India and the Government of India do not support it. Investing in cryptocurrency is not even prohibited by any Indian law. The Indian government plans to enact the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. But this bill has been pending before the Lok Sabha for a long time.
Process of making crypto transactions in India
Crypto assets are decentralized and are not controlled by any central authority in India. This Quality makes them different from the earlier trading systems. Some of the reliable assets under it include Bitcoin and Ethereum. Any business investment or transaction in cryptocurrency is made at investors’ risk as there is no authority behind it. The following are the steps related to crypto transactions in India:
- The initial step is to choose a reliable and compliant Indian crypto exchange. This will help you convert your INR to crypto assets.
- Then, you need to set up your account. This involves the process of verifying personal identity as per KYC norms.
- After this, there is a two-factor authentication process. This is a deterrent to hackers and scammers.
- Some investors prefer holding cryptocurrencies for a longer period. But some hold it for a shorter duration to get price-fluctuation benefits and make a profit.
Legality of Cryptocurrency in India
This concept is neither legal nor illegal as no law is enacted on the same. The Reserve Bank of India issued a circular on 06th April 2018 directing the entities regulated by RBI:
- Not to deal in virtual currencies.
- Not to help any person or entity in dealing with virtual currencies; and
- To exit such a relationship if they were already providing such services.
But this circular was challenged in the case of Internet & Mobile Assn. of India v. Reserve Bank of India wherein the Supreme Court quashed RBI’s circular aiming to ban the dealings in cryptocurrency. The court emphasized the need to adapt to cryptocurrency.
In 2019, the Banning of Cryptocurrency & Regulation of Official Digital Currency Bill was introduced to ban cryptocurrency transactions in India. Still, it was not implemented due to the growing demand of the economy to adapt to this new concept.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was drafted by the Lok Sabha. This bill was introduced to create a favorable structure. It provides that the Reserve Bank of India will issue the official digital currency. The bill has to be enacted because India’s cryptocurrency transactions climbed to $172 billion between July 2021 and June 2022. This urges the need to regulate cryptocurrency transactions in our country. The Foreign Exchange Management Act deals with foreign transactions undertaken by Indian companies. But the application of this act on cryptocurrency is ambiguous. It is considered that this concept needs international collaboration and security laws.
Recently, through the Official Gazette notification, the Ministry of Finance has brought Virtual Digital Assets (VDA) or Crypto Currency under the Prevention of Money Laundering Act (PMLA). This step was initiated to bring transparency to cryptocurrency trading. This measure is also expected to help investigative agencies act for crypto firms. These Virtual Digital Assets related businesses have now become the reporting entities under the Prevention of Money Laundering Act. Also, they are supposed to follow the required standards and the KYC norms.
Taxability of Cryptocurrency in India
The term Cryptocurrency has nowhere been defined under the Indian Legal System. But, Section 2(47A) of the Income Tax Act, 1961, by a recent amendment, defines the term ‘virtual digital asset’ as:
- any information, code, number, or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise and providing a digital representation of value exchanged: which could be with or without any consideration, with the promise or representation 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 scheme; and can be transferred, stored or traded electronically.
- A non-fungible token or any other token of similar nature.
- Any other digital asset specified by the Central Government by notification in the Official Gazette.
Before the Union Budget of 2022, cryptocurrency was not taxable. But now, the government has announced a 30% tax on cryptocurrency gains and a 1% tax deducted at source. Under the Income Tax Act of 1961, Section 115BBH provides provisions to tax cryptocurrency. It provides for a tax rate of 30% on the income arising from the transfer or sale of Virtual Digital Assets. Further, an Indian resident who handles the transfer of virtual digital assets has to pay a tax of 1% rate on such a sum. So, Section 194S of the Income Tax Act, 1961 provides for the deduction of TDS @ 1%. Also, this provision is not applicable for sums less than 10,000 in general cases. In the case of ‘specified persons’ the threshold limit is INR 50,000.
Conclusion
Change is the law of nature. Human beings were earlier dependent on the barter system. With the change in time, the concept of money came into existence. It is time to adopt cryptocurrency as a change with advancing technology. It is very important to adopt this concept as it is emerging as a promised form of investment in modern times. The Indian government should legalize investments in cryptocurrency. This can be done by enacting the yet pending ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’.