India’s Cryptocurrency Bill in the Works: Definition, Clarity on Taxation Key Priorities

Posted by India Briefing Written by Naina Bhardwaj

India is working on a cryptocurrency bill as key stakeholders want clarity from the government on issues of definition, tax treatment, and regulation. While the introduction of the draft bill is awaited, we discuss what we know about the bill’s objectives and possible treatment of cyrptocurrency assets in India, as reported in the media.

It has been reported by The Economic Times that India’s federal government is working on introducing a cryptocurrency bill. The Finance Minister Nirmala Sitharaman has said that she is awaiting an approval from the Cabinet on the cryptocurrency bill. It is expected to define cryptocurrencies in India and will compartmentalize the respective and currently unregulated digital currencies, based on their usage. Meanwhile, the inter-ministerial panel on cryptocurrency under the Chairmanship of Secretary (Economic Affairs), formed to study issues related to virtual currencies, has submitted its report.

The much-anticipated legislative development is timely. At present, there is no uniform definition for crypto assets in India, creating risks for users, investors, and authorities. The lack of uniform definition has posed regulatory challenges for taxation, financial security, monitoring, etc., and these have been repeatedly flagged by the Reserve Bank of India (RBI). Moreover, investment in cryptocurrencies grew from nearly US$923 million to US$6.6 billion in India, in the period from April 2020 to May 2021.

Overall, the cryptocurrency bill’s expected objectives (as cited by expert observers) will regulate cryptocurrencies for taxation purposes – so that they can be treated correctly in the books of accounts. The scope of this bill thus does not cover the recognition of digital and virtual currencies as mediums of payment and settlements; rather, its ambit is expected to look only at how to regulate the recognized cryptocurrencies.

How will cryptocurrencies be defined in India?

The Economic Times reports that cryptocurrencies like Bitcoin, Ethereum, Tether, etc. will be treated as assets or commodities for all purposes, including taxation and other utilities like payments, investment, etc.

It is pertinent to note that only government-approved cryptocurrencies will be allowed to be traded in India once the bill comes into effect.

The draft bill will possibly address concerns and ambiguities regarding the tax incidence on cryptocurrency assets in India, which presently persist due to lack of relevant regulations. It is also being speculated that the government may also introduce a security transaction tax (STT) on the trading of cryptocurrencies.

Currently, there is no clarity from the government on whether cryptocurrency should be treated as a commodity, currency, service, or capital asset. Due to the absence of a dedicated and defined cryptocurrency law, it is also feared that government tax revenues have not been realized to the full.

Categorization of cryptocurrencies

Reportedly, the compartmentalization of these cryptocurrencies will be done on the basis of the technology employed and ‘as per use case’. In other words, the government will categorize cryptocurrency assets based on their end-use.

What are stakeholders saying?

As India leapfrogs to attain second place globally in terms of cryptocurrency adoption, cryptocurrency exchanges across India have come together to lobby for a cryptocurrency regulation law.

At present, India is trading more than 5000 different cryptocurrencies and each one has different technological features and legal characteristics. A technology law expert at Nishith Desai Associates highlights the need for a tailored regulation keeping in mind the end usage of every particular type of token.

According to reports, these exchanges have sent their representation to the government with various suggestions regarding the regulation and future usage of crypto assets in India. One of the proposals demands that crypto tokens be treated as a digital asset and not as currency.

They have further sought clarification on policies with regards to exchange ownership parameters, KYC, accounting and reporting standards, etc. and have called for a system for introducing home grown assets.

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