Mirroring the global trend, cryptocurrency mania gripped Indian residents at the end of 2017 with number of exchanges offering trading facilities reaching 15 with corresponding increasing in active traders as well as investors. However, Indian regulatory response to the “Cryptomania” was slow to arrive.

The first mention of the same was in February 2018 when Honorable Finance Minister of India in his budget speech expressly stated that the Government does not consider cryptocurrencies as a ‘legal tender’. Soon after
the speech, on April 5, 2018, Reserve Bank of India (RBI) directed all banks to wind up all banking relationship with virtual currency exchanges and traders.

Important to note that the government has not categorized cryptocurrency as ‘illegal’. ‘Not being a legal tender’ is not the same as being ‘illegal’. Not a legal tender implies that the Government does not consider it as an official currency i.e. you cannot use it like money.

However, people can own it or trade it on regular basis, just like one would transact in a barter system, all the while being within four corners of the law. Thus, it would seem that the Government has tried to restrict the utility
of cryptocurrency as official tender, as of now. And this position adds to the confusion in the minds of various stakeholders.

Jolted by the RBI’s directions, a number of cryptocurrency exchanges challenged the ban in the Supreme Court (Apex judicial authority in India). The matter is still pending before the court. Also the court has declined to offer any sort of interim relief on the RBI restrictions to cryptocurrency transactions as of now.

This dealt temporary blow to virtual currency exchanges and traders and the trade volumes dipped for a short period. However, the said ban pushed investors and sellers to seek out alternate ways to transact like peer to peer trading platforms or – the Government’s worst nightmare – using cash. Gradually, trading volumes surged dramatically with average daily volumes as high as $75 million – close to levels before the rule changes – Coindelta, the Pune-based cryptocurrency exchange, told Reuters.

However, Government has another ace up its sleeve in its endeavor to curb Crypto trade. Impending trouble for cryptocurrency investors is taxability under Goods and Services Tax (GST) Act. As per the recent Bloomberg article, the government of India may levy GST of 18% on digital currency trades, even if there’s lack of clarity about their legal status in India. The value of a cryptocurrency transaction would be based on the value in rupees or the equivalent in freely convertible foreign currency. This would clearly impact the returns of the investors and Government is hoping that it would curb the enthusiasm of Crypto traders.

Amongst all authorities in India which targeted cryptocurrency, India’s Income tax department had first mover advantage. Notices were issued to around 0.1 Million traders and investors in February 2018 asking questions over their crypto trade even when heavy ambiguity exists as to the taxability of cryptocurrencies.

This ambiguity arises due to its unique quality – being considered as a security as well as a currency or as goods and services (‘Currency’ has not been defined in the tax laws). The income tax problem becomes compounded
due to inherent difference in Indian income tax between taxation of capital assets taxed at lower rates vis-à-vis taxation of business profits taxed at higher rates.

Another view suggests that if cryptocurrency are classified as capital asset, the virtual currency earned from mining these currencies might not be taxed as assets generated from mining process will be considered as a ‘Self-generated’ capital asset.

In the backdrop of all the above controversies and confusion in relation to cryptocurrency regulation, Department of Economic Affairs secretary has commented that draft regulations would be ready and presented before the year end. Looking at the current scenario in relation to cryptocurrency in India, the one hopes that the above draft would highlight a broader clarity in relation to legality as well as taxability of cryptocurrency in India.

– The Rise of Digital
Currency… Money of
the Future?“

On a separate related note, it should be noted that various government agencies in India are serious about using Blockchain technology (Distributed ledger system allows organization of any chain of records or transaction without the need of intermediaries) into the growing digital economy of the country. To cite few examples, revenue department of India’s largest state – Uttar Pradesh is introducing Blockchain technology in next six months to store and protect land-related data. Another state Kerala has embarked on a strategy to leverage the Blockchain technology to streamline purchase and distribution network of milk, vegetables and fish in the state.

Thus, it is clear that Indian Government may go hard on making laws relating to trading of virtual currencies in India but it cannot ignore the underlying benefits that a Blockchain technology may provide giving a tremendous
boost to economy.

Contributed by
Madhavi Nirban, cas@cas.ind.in
Chaturvedi & Shah