Centre for Internet and Society

What does the 2022 Finance Bill mean for crypto-assets in India?

Vipul Kharbanda, Aman Nair — 2022-02-03T06:31:54Z

The recent budget speech saw the Finance Minister propose a slew of measures that seek to clarify the taxation regime with regards to crypto-assets in India. The speech, and the proposed measures, have led to significant discussion and debate within the domestic crypto-ecosystem as questions continue to be raised about the ambiguous legality of crypto-assets in the absence of any dedicated crypto legislation. In the face of this uncertainty, this blog post looks to contextualise the proposals put forth by the Finance Minister in her speech and clarify what they mean for crypto-asset regulation and use in India.

Crypto-assets defined as a virtual digital asset and taxed at 30%

The 2022 Finance Bill, introduces the definition of a ‘virtual digital asset’ as an amendment to the 1961 Income Tax Act. The government defines a virtual digital asset as:

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 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, but not limited to investment scheme; and can be transferred, stored or traded electronically;
A non-fungible token or any other token of similar nature, by whatever name called;
Any other digital asset, as the Central Government may, by notification in the Official Gazette specify

Furthermore, the bill also introduces section 115BBH to the Income Tax Act, according to which income or profits generated from the transfer of ‘virtual digital assets’ would be taxed at the rate of 30%. The Finance Minister further clarified that any expenses incurred in carrying out such trades cannot be set-off or deducted from the profits generated, except the amount spent on buying the crypto-asset in the first place. Further in case of losses incurred from crypto-asset trading, such losses cannot be carried over to subsequent financial years.

While this clarification of the provisions relating to crypto-assets under the Income Tax Act, 1961 drew much attention for their potential impact, it is important to note that this measure is far from a departure from the government’s pre-existing stance. In responses to parliamentary questions on 30th November 2021 and 23rd March 2021, the Minister of Finance has repeatedly stressed the liability to pay taxes on any profits arising out of crypto trading under Indian tax law.

The budget speech merely clarified the provisions under which profits from crypto trading shall be taxed. Prior to this, there had been a fair amount of debate as to whether profits from crypto trading would be included as part of the regular income, income from other sources, or if they would be taxed as capital gains. This distinction and categorisation was critical as it determined the rate of tax applicable to crypto profits. However with the proposed section 115BBH, the government has made the taxation regime clearer on how these profits are to be taxed.

Introduction of TDS onto crypto-asset transactions and transfers

Another provision that this budget has proposed is the introduction of a 1% TDS (Tax Deducted at Source) on any transfer of a crypto-asset, provided that other conditions in relation to aggregate sales specified in the proposed section 194-S are satisfied. It must be noted that this TDS shall be payable not only on cash transfers, but even on trades where one cryptocurrency has been traded for another cryptocurrency. Thus trades where Bitcoin is bought using Tether would also be liable to such TDS deduction. Interestingly, the way the provision is currently drafted, if any person accepts payment for any goods or services in cryptocurrency, then such a person would be liable to pay TDS at 1%. This is because the Income Tax Act treats the cryptocurrency as the asset being bought or sold and treats the good or service being provided by the “seller” as the consideration. Thus instead of it being looked at as a transaction where one person is paying for something by using cryptocurrency, it is looked at as a transaction where the other person is buying the cryptocurrency and paying for it in kind (through the goods or services of the “seller”).

Questions of enforcement still remain

While these measures do bring a certain level of clarity and stability in the taxation regime with regard to crypto-assets, one still needs to grapple with the issue of their implementation. News reports suggest that about 15-20 percent of the investors in crypto assets are in the 18-20 year age group. A number of such investors do not file tax returns since they are mainly students investing their extra savings or “pocket money” to make a quick profit. Ensuring that this demographic actually follows the letter of the law may be a challenge for the revenue authorities and it would be interesting to see how they overcome it.

For more details visit https://cis-india.org/internet-governance/blog/what-does-the-2022-finance-bill-mean-for-crypto-assets-in-india

Report on Regulation of Private Crypto-assets in India

Aman Nair, Vipul Kharbanda, Aryan Gupta — 2022-01-27T09:16:08Z

CIS is excited to release its flagship report on regulating private crypto-assets in India.

Link to the report: CIS report on regulation of private crypto-assets in India

Link to Annex 1: Excerpts from the public consultation comments received from Ripple

EXECUTIVE SUMMARY

As of May 2021, the crypto-asset market in India stood at USD 6.6 billion. With no signs of slowing down, crypto-assets have become an undeniable part of both Indian and global financial markets. In the face of this rapid growth, policymakers are faced with the critical task of developing a regulatory framework to govern private crypto-assets.

This report is an introductory resource for those who are looking to engage with the development of such a framework. It first provides an overview of the technical underpinnings of crypto-assets, their history, and their proposed use cases. It then examines how they fit within India’s current legislative and regulatory framework before the introduction of a dedicated crypto-asset law and how the government and its institutions have viewed crypto-assets so far. We present arguments for and against the adoption of private crypto-assets and compare the experiences of 11 other countries and jurisdictions. Finally, we offer specific and actionable recommendations to help policymakers develop a cohesive regulatory framework.

What are crypto-assets?

At their core, cryptocurrencies (CCs) or virtual currencies (VCs) are virtual monetary systems consisting of intangible ‘coins’ that use blockchain technology and serve a multitude of functions. While the word ‘cryptocurrency’ is often used as an umbrella term to describe various assets within the crypto-market, we note that these assets do not all share the same characteristics and often serve different functions. Therefore, for the purposes of this report, we use the term ‘crypto-assets’ rather than ‘cryptocurrencies’ when discussing the broad range of technologies within the crypto-marketplace.

Crypto-assets utilize a distributed ledger technology (DLT) known as blockchain technology. A blockchain is a complete ledger of all recorded transactions, which is created by combining individual blocks, each of which stores some information and is secured by a hash. Blockchain, by the very nature of its architecture, can be used to ensure decentralisation, authenticity, persistence, anonymity, and auditability.

History and proposed uses of crypto-assets

While other forms of crypto-assets have been proposed in the past, the modern conception of one can be traced to a research paper published under the pseudonym, Satoshi Nakamoto, which first proposed the idea of bitcoin. Bitcoin, as it was presented, seemingly solved the ‘double spending’ problem by utilising a form of DLT known as blockchain. Bitcoin, which was first operationalised on 3 January 2009, has since become the dominant crypto-asset globally – trading at over USD 57,000 per bitcoin.

Following the popularity of bitcoin, several alternatives (known as alt coins) were launched, the most popular of which is ethereum. According to CoinMarketCap, as of April 2021, there are over 9,500 traded cryptocurrencies in existence, with a total market capitalisation of over USD 2 trillion. The rise of bitcoin and other crypto-assets also led to the emergence of crypto-exchanges such as Binance. These exchanges act as platforms for users to buy, sell, and trade crypto-assets.

Many potential use cases for crypto-assets have been identified, including:

A method of payment
A tradeable asset
Initial coin offerings
Crypto-asset funds and derivatives
Crypto-asset-related services

Legal frameworks and private crypto-assets in India

While crypto-assets are also referred to as virtual currencies and cryptocurrencies, they do not currently satisfy the legal requirements to be considered as currency under Indian law. Although they have not yet been classified as a financial instrument, it is possible, through executive action, to include them within the definition of any of the following instruments: currency, foreign currency, derivative, collective investment scheme, or payment system. Such a move would give the government a legal basis to regulate the hitherto unregulated crypto-asset market, thereby bringing about much-needed stability and minimising the risk of fraudulent practices.

Understanding the case for private crypto-assets

This report examines both the benefits and limitations of crypto-assets across a number of their use cases.

Benefits of crypto-assets as a currency and asset:

Decentralised and verifiable transactions
Reduced transaction costs
Confidentiality
Security
Easier cross-border transactions
A potential tool for financial inclusion

As a tool for verifying asset ownership

Limitations of crypto-assets as a currency and asset:

High environmental costs
Replaces traditional transaction costs with new costs
A few actors dominate mining
Cannot replace traditional money
Introduces challenges in implementing monetary policies
Lack of network externalities
The limited actual impact on financial inclusion
Use for illegal activities
Prone to schemes and scams

International Perspectives

In order to draw inferences and lessons from a multitude of perspectives, we examined the regulatory frameworks governing private crypto-assets in the following jurisdictions:

European Union
El Salvador
United States
United Kingdom
Japan
Venezuela
South Africa
Singapore
Indonesia
Switzerland
China

Recommendations

Keeping in mind the benefits and limitations, as well as the experiences of countries around the world, we recommend the following measures to develop an appropriate regulatory framework in India. We have divided our recommendations into 2 types: immediate or short term measures and longer term measures.

Immediate/ Short Term Measures

Steering clear of bans private crypto-assets

Earlier, regulatory bodies made calls to ban private crypto-assets, but this resulted in crypto-assets being assimilated into the unregulated black market, thereby stifling potential innovation. To that end we recommend avoiding a ban, and adopting a regulatory approach instead.

Recommend that regulatory bodies use their ad-hoc power to exercise interim oversight

During the interim period, prior to the adoption of a dedicated crypto-asset legislation, crypto-assets could be included under one of the existing financial instrument categories. The regulations governing them would apply to both cryptocurrency exchanges as well as vendors who accept payments in cryptocurrencies.

Long Term Measures

Specific Regulatory Framework

There needs to be an independent regulatory framework specific to crypto-assets since the unique features of crypto-assets make them unsuitable to be regulated through the existing regulatory frameworks.

Identify clear definitions

Policymakers should adopt a definition of crypto-assets that includes entities that have emerged within the crypto space but which cannot be classified as ‘currencies’. They must also categorise and define these various entities as well as crypto-asset service providers.

Limit the scope of regulations to crypto-assets rather than their underlying technologies

Any proposed regulation must differentiate between the assets themselves and the technology underlying them. This would ensure that crypto-assets are not defined by the technology they currently use (i.e., DLT and blockchain) but by the purpose they serve.

Introduce a licensing and registration system

A licensing system, similar to those adopted in other jurisdictions such as the EU or New York, can be adopted to ensure that the state is able to effectively monitor crypto-related activities.

Make provisions for handling environmental concerns

A dedicated taxation programme and strict limitations on mining can minimise the environmental costs associated with crypto-assets.

Consumer protection measures

Any potential licensing system must include mandatory obligations for crypto-asset service providers that ensure that consumer rights are protected.

Taking measures to limit the impact of crypto-asset volatility on the wider financial market

Governments must take measures to ensure that the volatility of crypto-markets does not have a significant knock-on effect on the wider financial market. Such steps can include limiting financial institution holdings and dealings in crypto-assets.

Extending Anti Money Laundering/ Counter Financing of Terrorism norms and exchange control regulations

Given the anonymous nature of crypto-assets and their potential for use in illegal activities, we recommend ensuring that crypto-specific anti-money laundering, prohibition of terror financing and foreign exchange management rules are introduced.

Create an oversight body

Subject to the availability of resources, the government might consider establishing a dedicated body to oversee and research changes in the crypto-marketplace and make appropriate suggestions to the concerned regulatory authorities.

Taxation

The existing uncertainty with regard to the correct tax provisions to be applied for various transactions when dealing with crypto-assets needs to be clarified with specific amendments to the tax provisions.

Stablecoin Specific Regulation

Given the specific position occupied by stablecoins, and the unique role that they perform in the crypto-ecosystem, any legislation that seeks to regulate private crypto-assets must focus heavily on them. To that end, policymakers should pay special attention to identifying the various entities associated with stablecoins, applying greater regulatory scrutiny onto those entities and taking steps to limit the risk that stablecoins pose to the wider financial system.

Note

A previous version of this post contained a link to a public consultation version of the crypto report. This version has since been taken down and the current version of the document is the final version.

For more details visit https://cis-india.org/internet-governance/blog/report-on-regulating-private-crypto-assets-in-india-public-consultation

Chennai: Learn to Protect your Online Activities!

bernadette — 2013-08-01T12:16:52Z

The Centre for Internet and Society cordially invites you to a Crypto Party at Asian College of Journalism Second main Road (Behind M.S. Swaminathan Research Foundation) Taramani in Chennai on August 7, 2013, 4.30 p.m. to 6.30 p.m.

"Governments around the world, are greatly increasing their surveillance of the Internet. Alongside a loss of the private sphere, this also represents a clear danger to basic civil liberties. The good news is that we already have the solution: encrypting communications makes it very hard, if not entirely impossible, for others to eavesdrop on our conversations. The bad news is that crypto is largely ignored by the general public, partly because they don't know about it, and partly because even if they do, it seems too much trouble to implement." (Source)

So lets go and have a party, and teach each other how to crypto!

Everyone is invited! Especially do not hesitate to join if you are not using any crypto at all (yet!)

Here is a Flyer / Printout for you to spread the message!

For more details visit https://cis-india.org/internet-governance/cryptoparty-chennai

Centre for Internet and Society

What does the 2022 Finance Bill mean for crypto-assets in India?

Crypto-assets defined as a virtual digital asset and taxed at 30%

Introduction of TDS onto crypto-asset transactions and transfers

Questions of enforcement still remain

Report on Regulation of Private Crypto-assets in India

EXECUTIVE SUMMARY

What are crypto-assets?

History and proposed uses of crypto-assets

Legal frameworks and private crypto-assets in India

Understanding the case for private crypto-assets

International Perspectives

Recommendations

Immediate/ Short Term Measures

Steering clear of bans private crypto-assets

Recommend that regulatory bodies use their ad-hoc power to exercise interim oversight

Long Term Measures

Specific Regulatory Framework

Identify clear definitions

Limit the scope of regulations to crypto-assets rather than their underlying technologies

Introduce a licensing and registration system

Make provisions for handling environmental concerns

Consumer protection measures

Taking measures to limit the impact of crypto-asset volatility on the wider financial market

Extending Anti Money Laundering/ Counter Financing of Terrorism norms and exchange control regulations

Create an oversight body

Taxation

Stablecoin Specific Regulation

Note

Chennai: Learn to Protect your Online Activities!