CRYPTO ASSETS: LEGAL IMPLICATIONS IN INDIA

From the very beginning, the Government of India has been sceptical about crypto assets. Time and again, the Reserve Bank of India ("RBI") has come up with press releases about the security concerns and cautioned investors against trading in crypto assets. The RBI issued a circular in April 2018 ("RBI Circular") prohibiting banks from providing services to the crypto asset sector. The RBI circular was, however, stuck down by the Supreme Court on the grounds of proportionality of such measure which lacked aspects of damage to the banking entities regulated by the RBI.

Post the apex court's order, the Government was expected to come up with specific regulations for the crypto sector. However, deliberations are still on with respect to the legality of crypto assets. In the meanwhile, in its Union Budget 2022 ("Budget") announced on 1st February 2022, the Government of India has proposed to tax virtual digital assets ("VDA"). VDAs, as recently defined in the tax regulations, include:

(a) 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;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein."

The Budget further states that any income from transfer of any virtual digital asset shall be taxed at the rate of 30%. Furthermore, the Budget proposes to levy tax on gift transactions pertaining to crypto assets.

Key Issues and Consideration

• The RBI Notification allows banks and financial institutions to facilitate trading in Crypto assets, however, one of the major issues is that, even as of date, banks and financial institutions are reluctant in providing any assistance to businesses and customers with respect to Crypto assets. A possible reason to this is that Crypto assets still remain a grey area as far as the Indian market is concerned, leaving the banks and financial institutions doubtful about its fate.
• While, the Government of India has provisioned to tax Crypto assets at the highest slab rate, it has not per se legally recognized them in the country. It is an unjustified move that the Government wants to benefit from the tax on VC transactions, however, it is not yet ready to regulate Crypto assets in the country. Evidently, the Government can see potential in Crypto assets in the Indian market in the recent future and provisioning tax on Crypto assets might be the Government's first move towards the future of Crypto assets.
• The definition of VOA has been introduced under the relevant tax regulations, however, from the literal interpretation of the definition, by the use of the words 'token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called" it seems that the Government proposes to tax Crypto assets, but it is not intending to recognise Crypto assets per se as a type of 'currency' in the country. It is essential to note that currently this definition is under the tax regulations, however, in near future, the very definition could also be used for other tax and legal purposes including, but not limited GST.
• As per the Budget, in case of any loss due to a VOA transaction, no set off shall be allowed to the assessee under the latest amendments in the tax regulations.
• The Budget has further proposed to impose 1% tax deduction at source (TOS), which will be effective from 1st July, 2022, on any payments made as consideration for transfer of VOAs, irrespective of whether there is a gain or not. Therefore, now, if a buyer and seller are trading in VOAs through any crypto exchange, the crypto exchange is required to deduct 1% of the total consideration as a withholding tax on behalf of the seller on each such transaction. This TOS requirement will apply to Indian crypto exchanges and not foreign crypto exchanges, hence, there is a possibility that entities will move overseas to establish crypto exchanges in order to avoid TOS and other related compliance. The country might see an overall drop in VOA transactions.
  Furthermore, it is unclear as to what will happen in case of a crypto-to-crypto transaction, where, both buyer and seller are transferring one type of VC with another, hence, there should be clarity on who will be deducting TDS in such a case.
• Currently, in accordance with the Goods and Services Tax Act, 2017 (GST), 18% GST is levied on the crypto exchanges. The GST council is working on classification of crypto currency as 'goods' or 'services' under the GST law, such that tax can be levied on the entire value of transactions. There is a possibility that the GST council might come up with a higher tax rate for VDAs in the near future.
• In case of gift of Crypto assets with fair market value (FMV) of over INR 50,000, 30% tax will be levied on the recipient of such gift and will be considered as 'income' for the recipient. However, there needs to be clarity as to how is FMV of Crypto assets to be calculated.
• In the absence of a regulatory framework in the country, the businesses/customers dealing with crypto liquidators (whether Indian or overseas) are at high risk, since, the fate of Crypto assets is uncertain. There is, therefore, an ambiguity concerning scenarios such as, what will happen if the Government of India imposes a ban on private Crypto assets, whether the liquidators will be able liquidate the investments made by the businesses/customers with them. Further, the risk as to how to identify a reliable liquidator cannot be ignored, since , liquidators are mostly newly incorporated private entities without any prior historical background in the market.
• The Advertising Standards Council of India (ASCI) has, In order to
  safeguard consumer int serest, and to ensure that ads do not mislead or exploit con summers, released new guidelines for advertisers publishing ads about VDAs. The guidelines will be applicable to all advertisements released or published after 1 April 2022.
• Under the Companies Act, 2013 ("Act"), com pansies /entities are prohibited from accepting 'deposit s' from the public (except in certain cases), hence, the businesses/entities must be careful and compliant of the provisions of the Act.
• Businesses intending to create platforms to facilitate trade in Crypto assets, wherein, they provide e-wallets or any type of Prepaid Payment Instruments ("PPI") to customers, must note that, each e-wallet /PPI has its own set of restricted use and conditions, ther for e, careful evaluation and consideration is required to ensure that businesses are operating in a compliant manner.
• In case, VC platforms which facilitate trade in Crypto assets are recognized in the country, these platforms will be interpreted as 'Intermediaries' under the Information Technology (Intermediary Guidelines) Rul es, 2021, meaning thereby, the platforms will have to comply to these guidelines.
• Another concern from the regulatory perspective for Crypto assets is compliance with FEMA provisions. FEMA compliance cannot be ignored by any person trading or looking to deal in Crypto asset s. Further, since, any person can transfer Crypto assets to any person irrespective of their location and nationality without any proper documentation, whatsoever, therefore, the platforms/crypto exchanges should keep a check vis-a-vis money laundering and other illegitimate activities as the Government of India has strict guidelines and therefore, consequence of non-compliance can be severe.

The issues and concerns highlighted above require clarification and need some serious consideration from the relevant market players such as persons, entities and stakeholders interested in the industry. Further, We are of the view that once the Government regulates Crypto assets by way of a specific legislation or advisory addressing the issues stated above, the crypto or the VC market will be a cleaner  space. Till then,  it is recommended that the market players do a strict legal check and conduct careful calculations to conclude their investments in the crypto market. Furthermore, it would be helpful if the stakeholders in the VDA industry and the relevant associations make timely representation before the GST council prior to the GST council issuing its clarification pertaining to GST.

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