• Dia Shetty

Decoding ‘Cryptic’- Currencies within the Indian Business Realm



Introduction

In today’s globalized economy, there has been a technological shift in the way businesses all across the world operate and have resorted to operating on a digital platform over the past decade. One key change has been the utilization of crypto-currencies, such as Bitcoins, Ethereum and so on, for digital financial transactions.

While there is no standard legal definition of crypto-currencies, the Financial Action Task Force defines it as a decentralized convertible digital currency that is protected by cryptography. It depends on public and private keys to transfer value from one entity to another, which must be cryptographically signed at the time of transfer. Crypto-currencies are independent of the central banking system and functions through block-chain, which is a database that regulates public ledger for every transaction.[i]

Since crypto-currency is a relatively new concept and remains under construction, there are both advantages and disadvantages attached to it. There is a vast scope in further developing its use in the Indian business realm through Government intervention and regulation.


Crypto-currency in India

In India, the Central Government has been at the forefront in promoting digital payments in order to ensure that the country becomes a ‘cashless economy’ in the future. While several Indian companies such as Bajaj Finserv, Kappian Inc. and others have already advanced to block-chain technology, there has been minimal intervention by the Government of India in regulating the use of crypto-currency.


Indian regulations on Crypto-currency


1. The Reserve Bank of India

As early as 2013, the Reserve Bank of India (RBI) continuously warned users, holders and traders of crypto-currency about the risks involved in dealing with it. Consequently, the RBI issued a circular in 2018 that placed a restriction on regulated entities dealing with crypto-currencies. It directed entities regulated by the RBI to not deal in crypto-currencies and not to provide their services to any person or entity that dealt with the same.

Subsequent to the circular, the Supreme Court of India adjudicated upon the matter in the case of Internet and Mobile Association of India v. Reserve Bank of India (2020). Supreme Court held that even if something was not equivalent to currency but could act as money under certain circumstances, then the RBI would have jurisdiction to deal with it. Thus, the RBI did have the power to deal with crypto-currency, although it did not equate it with legal tender or fiat money. However, the Court held that the circular infringed upon the Fundamental Right to Trade in Business under Article 19(1)(g) of the Indian Constitution and that the circular was not proportional to the concerns raised by the RBI. None of the regulated entities suffered any drastic loss, contrary to the RBI’s apprehensions and anticipations, as a result of dealing in crypto-currencies. The Court noted that the ban imposed by the RBI would have adversely affected the businesses that did employ crypto-currencies. Therefore, in due consideration of this issue, the circular was struck down.


2. The Companies Act, 2013

On 24th March 2021, the Ministry of Corporate Affairs issued a notification that amended the rules under Schedule III of the Companies Act, 2013. As of 1st April 2020, companies will have to disclose their profits or loss on transactions dealing with crypto-currencies along with the amount of holding and details of deposits or advances from any persons for the purpose of trading in crypto-currency.


This is the first step that the Indian Government has taken towards the regulation of crypto-currency, as opposed to speculations of the Government’s plans on banning it. While this move indicates the Government’s intention to have proper mechanisms in force to regulate crypto-currency, further regulations will need to be put in place to bring about more clarity on other aspects of crypto-currency, such as taxation, liability for default, data protection and so on.


Additionally, if further amendments and stringent regulations are added to the Companies Act, 2013, then small and medium enterprises could potentially engage in Initial Coin Offerings (ICO). An ICO is similar to an Initial Public Offering, which is a creation of digital tokens by start-ups and small companies to potential investors in exchange for fiat currency or dominant crypto-currency. This would allow small retail investors to finance start-ups and small enterprises and would also be another method by which enterprises can expand their businesses.


Taxation of Crypto-currency under Indirect Tax in India


As of now, the Central Government stated that it seeks to pass the Crypto-currency and Regulation of Official Digital Currency Bill, 2021 in the Budget Session of Parliament, 2021. The Government may ban all private crypto-currency and introduce an official digital currency that the RBI would regulate. The Government is still continuing their discussions with stakeholders after which there will be a panel report and then inter- ministerial meetings. The final draft of the Bill is yet to be presented before the Cabinet.


Until now, the RBI has not yet recognized crypto-currency as currency under Section 2(h) of the Foreign Exchange Management Act, 1999. The question that arises here is whether crypto-currency should be notified as a ‘currency’, thereby falling outside the purview of the Goods and Services Tax (GST), or should it be notified as a ‘good’ or ‘service’, thereby attracting GST?

In the United Kingdom, corporations are subject to corporate tax on crypto-currency transactions, and other countries such as Canada and Denmark have also brought crypto-currency within their taxation laws.


In India, if the Indian Government chooses to bring it within the purview of GST, then it would generate huge revenue for the State, while the business entities might face loss as part of their revenue would now be taxable. However, if the Government decides to legalize and tax crypto-currencies, it would have to ensure that the taxation realm, banking sector and the Companies Act are in tandem with each other to avoid any ambiguity surrounding the taxation of crypto-currency.


Conclusion

The Finance Minister, the Central Bank Governor along with the Supreme Court of India have all acknowledged that crypto-currencies have the potential and scope to improve efficiency and inclusiveness within the financial sphere and in the Indian economy. They have been a part of the international financial system for long now and major business entities such as Microsoft and Tesla have accepted crypto-currencies for their financial transactions. The Indian economy has the potential to legalize, develop and regulate crypto-currency in a way that businesses using it can function smoothly. Along with the ambiguities relating to the taxation of business crypto-currency transactions, regulation must specifically focus on risk areas such as tax evasion, data protection, money laundering, consumer and investor protection and legal recourses for breach. With more and more countries accepting crypto-currencies in their financial system, the Indian Government must make its stance clear on the legalization of crypto-currency, given its immense scope to boost the economy. The current pandemic has also led to businesses and consumers along with investors resorting to the use of digital payment transactions, which is why it is pertinent for India to have a secure structure and law in place.


References:

[i] Jordan Pritchett, Cryptocurrency: An Overview, 134 BLJ 547, 547 (2017).

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