Legal Status Of Cryptocurrencies In India – Government Recognition And Tacit De Facto Approval Of Digital Currency? – Fin Tech

There has been much discussion about the legality of
cryptocurrency in India. The various actions taken by the
Government of India lays down the clear intent of the authorities
to provide a recognized legal status to cryptocurrencies. 

It began with the RBI coming out with a circular, restraining
banks, NBFCs and payment system providers from dealing with virtual
currencies and providing services to virtual currency exchanges.
This resulted in crypto exchange platforms filing a writ petition
in the Supreme Court; the ban was ultimately struck down in the
case of Internet and Mobile Association of India v. Reserve Bank of
India, where the Supreme Court declared the RBI circular
unconstitutional. 

The latest amendment to Schedule III of the Companies Act, 2013
issued on March 24th 2021 states that from the new financial year,
all companies will be required to disclose their investments in
cryptocurrencies and also state any profit or loss involved in the
transaction. The holder of any virtual currencies will also have to
declare the number of holdings, details of deposit and advances
from any person for the purpose of trading or investing in
cryptocurrency. 

The Indian finance minister in the Union Budget 2022 announced
that “any income from transfer of any virtual digital asset
shall be taxed at the rate of 30 per cent.” Further, tax
deduction at source at the rate of 1% has been proposed for
transactions involving cryptocurrency. The minister also stated
that taxation of a virtual digital asset does not imply the legal
recognition of cryptocurrencies.  

Let’s now examine the legal position of what can be taxed in
India. The Income Tax Act does not differentiate between income
earned legally or illegally. Hence, the Income Tax department can
collect tax on all incomes. However, when the government is aware
that income has been generated through illegal sources, it is under
a statutory obligation to punish the perpetrators under various
punitive laws, including the Indian Penal Code, Benami Transactions
Act, etc. Since the government has not yet started criminal
investigations against any investor, trader or service provider of
cryptocurrency, it can be safely assumed that the government is
tacitly agreeing that income earned from cryptocurrencies is legal
income from a legal source. If the government were to decide
otherwise and prosecute citizens dealing in cryptocurrencies, it is
certain to open a proverbial Pandora’s box for the
government.  

The Indian Computer Emergency Response Team (CERT-In) on April
28th 2022 issued Directions under subsection (6) of section 70B of
the Information Technology Act, 2000 relating to information
security practices, procedures, prevention, response and reporting
of cyber incidents for Safe & Trusted Internet (Cyber Security
Directions of 28.04.2022).  

As per Cyber Security Directions of 28.04.2022, the virtual
asset service providers, virtual asset exchange providers and
custodian wallet providers shall mandatorily maintain all
information obtained as part of Know Your Customer (KYC). It shall
also maintain records of financial transactions for a period of
five (5) years to ensure cyber security in the area of payments and
financial markets for citizens while protecting their data,
fundamental rights and economic freedom in view of the growth of
virtual assets. If companies in the cryptocurrency sector have to
maintain data for 5 years, it means such companies will need to
exist for a further minimum period of five years. This in turn
reveals the government’s position of permitting
cryptocurrencies and service providers of such currencies to
exist.  

 These actions (as well as inactions) of the government are
clear evidence of the fact that the Government of India may have
permitted de facto approval of cryptocurrencies and the
dealing/trading of them.

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