The pressing questions about crypto regulation that India needs to answer

With the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 set to be introduced in Parliament – and despite a hacked message from the prime minister’s Twitter account about the government having ‘officially bought 500 BTC and is distributing them to all residents of the country’ on Sunday – there is much speculation about GoI ready to impose a blanket ban on all private cryptocurrencies. This comes in the wake of several unsuccessful attempts of regulating cryptocurrency, such as the unpassed draft Bill in 2019, and Reserve Bank of India (RBI) circular in 2018 that was struck down by the Supreme Court in 2020.

GoI officials have stated that only ‘private cryptocurrency’ would be banned. But clarity is awaited on the definition of the term. Industry experts believe that this could mean cryptocurrencies such as Monero and Dash, which even as they are based on ‘public’ blockchain technology, provide user privacy by obscuring the transaction information, unlike bitcoin and ethereum that are traceable. It could also mean all cryptocurrencies other than central bank CBDC, or all cryptocurrencies other than those issued by a private issuer with a value-equivalent asset backing.

The Bill is eagerly awaited so as to understand the GoI’s position on blockchain products. They differ from cryptocurrencies by being intangible assets backed by blockchain technology. Crypto-backed technology is essential for the future and how the government intends to regulate its products is something we must know. Questions also arise on whether crypto-assets can be purchased outside India under the Liberalised Remittance Scheme (LRS) route, or whether this will be restricted. There also has to be clarity on whether crypto exchanges will be treated as intermediaries and an ecommerce marketplace under FDI laws and ancillary regulations.

There has been considerable development internationally on taxation of digital currencies under value-added tax (VAT) and goods and services tax (GST). Many countries initially considered digital currencies as services, and, consequently, transactions involving purchase of goods or services in exchange for digital currencies were treated as barter transactions, which led to the issue of double taxation. The recent trend, however, is to treat digital currencies at par with fiat currencies, as far as indirect taxes are concerned.

For instance, Australia amended its GST law from July 2017 to provide that transactions involving digital currencies shall not be considered as barter transaction. Further, exchange of fiat currencies with digital currencies is treated as exempted financial services. Similar treatment has been adopted by Singapore in January 2020.

India’s GST law does not have specific provisions for digital currency. However, the definition of goods is not restricted to tangible properties, and that of services is very broad, and includes everything other than goods within its ambit. Thus, digital currencies will fall under the GST net either as goods or as services. Replenishment (REP) licence, the Duty Entitlement Passbook Scheme (DEPB) and intangible assets like canned software have been held by the court to be goods. Classification of digital currencies will need to be examined in light of these precedents.

The GST rate notification for goods is based on the Customs Tariff Act. Even if one assumes that digital currency is a good, the appropriate classification of digital currencies under the Act itself is unresolved. The rate notification provided for services also does not have any specific entry to encompass digital currency if one classifies the latter as services. Further, considering the dynamic nature of digital currencies, valuation and determination of the place of supply of the cryptocurrency also poses a challenge.

There is also the question of whether crypto exchanges qualify as ecommerce platforms or not. If they do, there may be additional FDI and tax deducted at source (TDS)/tax collected at sale (TCS) compliances under income-tax. Purchase of bitcoins may be subject to tax under the ‘income from business’ category or capital gains tax depending on the purpose and intent of such purchase or sale.

With the ban of certain cryptocurrencies on its way, we wait to see if GoI plans to regulate crypto exchanges, provides clarity on non-fungible tokens (NFTs) and blockchain technology, not to mention the transition time for banned crypto in India and holding of cryptos outside India. We also need clarity on GST treatment of permitted cryptos so as to avoid double taxation.