In India, the legal framework with respect to cryptocurrencies is still evolving. The Supreme Court of India, in the case of Internet and Mobile Association of India v Reserve Bank of India (2020) set aside the RBI circular dated April 06, 2018, which prohibited banking and financial service providers to interact with virtual asset service providers. Since then, no overarching regulation has been enacted by the Indian parliament with respect to cryptocurrencies.
The Ministry of Electronics and Information Technology (MeitY) published a ‘National Strategy on Blockchain’ in July 2019, which set out a vision of the Government of India for blockchain in India. It is based on three pillars, namely, Developing, Defining and Deploying. It also sets out the roadmap for infrastructural blockchain us-cases in India.
Through the Finance Bill 2022, however, specific provisions were introduced in the Income Tax Act 1961 which placed a 30% tax on cryptocurrency transactions. The government has since defended this move amid growing interest in the asset class. In a recent interview with CNBC, Finance Minister Nirmala Sitharaman said that the government is not planning to ban cryptocurrencies and is instead working on a regulatory framework for the asset class.
The Reserve Bank of India (RBI) has also been mulling a digital rupee and is exploring the possibility of launching a central bank digital currency (CBDC). In a recent report, the RBI said that the government is still studying the feasibility of a digital rupee and has not yet reached a consensus.
Here's a brief timeline of major regulatory developments:
- In March 2018, CBDT submitted a draft scheme to the finance ministry for banning virtual currencies. The draft scheme proposed to amend the Income Tax Act and other laws to prohibit any person from dealing in any virtual currency or facilitating such transactions. The draft scheme also suggested imposing penalties and imprisonment for violating the ban.
- In April 2018, RBI issued a circular that restrained banks and financial institutions from providing services to virtual currency exchanges. The circular stated that such entities should not deal with or provide services to any individual or business entities dealing with or settling virtual currencies. The circular gave three months for existing entities to exit such relationships.
- In March 2020, the Supreme Court of India quashed the RBI circular on the grounds that it was disproportionate and violated the right to trade. The court held that RBI did not demonstrate any harm caused by virtual currencies to its regulated entities or the economy. The court also observed that RBI had not explored alternative measures before resorting to a blanket ban.
- In February 2022, the Finance Bill introduced a capital gains tax of 30% and a TDS of 1% on the transfer of virtual digital assets such as cryptocurrencies and NFTs. The bill defined virtual digital assets as any information or code or number or token providing a digital representation of value exchanged. The bill also proposed to amend the Income Tax Act and other laws to include such transactions under their scope.
At the time of writing, India’s regulatory stand towards cryptocurrencies can be summed up as follows:
1. Cryptocurrencies are not legal tender in India.
2. Cryptocurrencies are not banned in India. 'Virtual Digital Asset' transactions are taxed at a high (30%) rate.
3. There is no specific regulation governing cryptocurrency exchanges. However, CBDT circulars 13 and 14 of 2022 specify their TDS obligations.
4. Blockchain startups are being encouraged through state incentives such as regulatory sandboxes.
5. The Indian CBDC is in a research and development stage.