Calls for crypto regulation from governments across the world are mounting as we step into 2022 but India's cryptocurrency sector has been thriving in a rather legal grey area for quite some time now. The union government has been keen on introducing a cryptocurrency regulation, or a bill, but if recent reports are anything to go by, further delay is expected as the upcoming budget session of parliament that commences on January 31 is unlikely to offer any immediate regulatory relief to investors or other industry stakeholders.
The bill is already delayed as it didn't get discussed during the winter session of the parliament that concluded on December 22 last year although Finance Minister Nirmala Sitharaman had earlier said that a “well-consulted” bill would be coming through and that it would be tabled in the parliament once the cabinet clears it. But a recent report by Coindesk reveals that the parliament intends to buy itself more time to hold more discussions and build consensus on the regulatory framework.
However, based on a mix of information that has come through over the past year and more, there are few things we can expect from the government, should the topic of cryptocurrency regulation come up over the upcoming budget session of the parliament which ends on April 8.
Taxation of cryptocurrency holdings
Crypto industry insiders, investors, and traders are expecting the introduction of a proper tax policy framework for crypto earnings in the upcoming Union Budget 2022 although that is likely to form only a portion of the eventual bill.
While the upcoming regulation may not bar Indians from dealing in cryptocurrencies, the government is likely to levy tax on them — depending on the classification of holdings as capital assets or a commodity. Should the government classify cryptocurrency as an asset class, levying TDS (tax deducted at source) and TCS (tax collected at source) on the sale and purchase of cryptocurrencies beyond a specific threshold will be a likely possibility. In case that happens, it will help the government know and track the investors.
Buying and selling cryptocurrency could be included under the ambit of reporting in the Statement of Financial Transactions (SFT) like trading companies usually report the sale and purchase of shares and mutual fund units.
Tax authorities can then use the statement to collect information on specific high-value transactions that a person carried out during the year. The individual will also have to include details of specified financial transactions or any reportable account that was registered, recorded, or maintained during the year in the statement.
The government can introduce a higher tax rate for gains made by an individual or entity from cryptocurrency trading too. The tax rate here can be 30 percent, which is similar for gains made from a lottery, game shows, puzzles, etc. If that happens, those trading in cryptocurrencies would have to pay taxes from the income arising from the sale of the digital assets.
The bill may also allow the Securities and Exchange Board of India (SEBI) to regulate cryptocurrencies as a capital market investment instrument. In this case, financial experts argue that there will be more stability in terms of institutional regulation and when it comes to understanding digital assets better. Investors will be able to diversify their asset portfolios by treating them as an investment instrument.
Alternately, the government and other stakeholders might opt to functionally categorise different cryptocurrency businesses — exchanges, wallet token issuers — and impose varying tax responsibilities on them. This could mean that different stages of cryptocurrency operations will be taxed differently, from mining to trading to liquidation.
Waiting for RBI to pilot its CBDC
The Indian government is keen on regulation, but it wants to hold more discussions and build a consensus, given the rapidly evolving technology involved. At the virtual summit of the World Economic Forum on January 17, Prime Minister Narendra Modi called for simultaneous global action to regulate cryptocurrencies, emphasising that efforts by any one country may not be sufficient.
But another reason why the government is trying to buy more time is the Reserve Bank of India's plan to launch a central bank digital currency (CBDC). As per a report by The Hindu, the Reserve Bank of India had decided to pilot a simpler CBDC model and to utilise the lessons from the pilot in creating a more sophisticated CBDC.
Now, a digital currency or CBDC is issued by the government or the central bank. Unlike cryptocurrencies, whose volatility is widely evident, a digital currency is more stable and backed by the authorities — similar to a stablecoin in essence, but that's not the only difference. Cryptocurrencies, including stablecoins, are decentralised, which may not be the case with the state-issued digital currencies.
A study report by the Financial Action Task Force (FATF) — an intergovernmental organisation that was set up to combat money laundering and terrorism financing, states that virtual cryptocurrencies provide enhanced anonymity compared to mainstream digital payment methods which can be used by terrorist organisations and criminals to launder their earnings or to finance illicit activities.
Additionally, non-CBDCs can interfere with the mandates of the central banks when it comes to supervising and efficiently managing the economy. In an economy with widespread usage and acceptance of non-CBDCs, the will of the central bank may have little relevance or heft. What's more, cryptocurrency transactions across borders can take place with relative ease and little supervision which will further hinder the central bank's monitoring authority and mandate.
Most importantly, since cryptocurrencies are decentralised, central banks will have no say when it comes to controlling the money supply in the economy, effectively robbing central banks of one of their most critical functionalities. All reasons why the RBI has been up in arms against crypto being afforded any legal protection by the government.
The proposed crypto bill by the Indian government may bring about tougher measures for crypto, including time in jail for those who violate the law, Reuters reported on Tuesday, citing an unidentified source and the summary of the draft bill.
Proposal to impose imprisonment and fines for violation
As per a Bloomberg report from early December, the government is planning a “general prohibition on all activities by any individual on mining, generating, holding, selling, (or) dealing” in digital currencies as a “medium of exchange, store of value and a unit of account,” according to the summary of the bill which is yet to be cleared by the cabinet.
While the tabled bill is unlikely to be seen over the upcoming budget session, the report does note that individuals who are found in violation could face arrest without a warrant, which could be “non-bailable,” the report added.
As per the report, India's capital markets regulator, SEBI, is expected be the regulator for crypto assets. Violators of exchange provisions could face a jail term and fines of up to $2.65 million (roughly Rs. 20 crore), according to previous reports. This does come as a blow to expectations that the Indian government might take a more relaxed stance on crypto, although parts of the bill could be up for revision before being passed as a legislation.
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