A comprehensive bill on cryptocurrencies is likely to be tabled for clearance at a meeting of the Union cabinet before or during the winter session starting on the 29th of November.
Sources said that once the bill detailing the regulation of cryptos, their classification, and intent to tax earnings from them gets the approval of the Cabinet, it may be taken up for passage in the winter session of Parliament.
After the intent to tax earnings from cryptos is formalised in the legislation, the provisions for implementation are likely to be announced in the finance bill during the Budget Session which usually begins in the last week of January.
A source with knowledge of the matter said that Finance Minister Nirmala Sitharaman’s budget is likely to include a move that will clear the air completely on the future of cryptocurrencies in the country.
Top sources in the government have been indicating that India may take a middle path, unlike a ban as in China, with the earnings from cryptos attracting both direct and indirect taxes.
Though the government has kept everything under wraps, the likelihood of cryptos being treated equivalent to currency is very slim, as currency notes and coins are backed by statute and are regulated by the RBI in consulation with the Centre.
“The Rupee has the backing of the sovreign, it can be regulated at every level, in the case of cryptos, getting the status of currency is a proble,. Who will provide the guarantee? That’s why there is a higher likelihood of cryptos getting accorded an investment asset category, which can be traded,” said an official.
A senior official said that the regulations the government is planning to bring in could involve permitting only those cryptocurrencies in India that have been approved by the authorities to be listed and traded on exchanges. This could eventually reduce both the number of players and the risks involved.
The first indication that the Centre was hunting for a middle path came on November 18th while addressing the Sydney Dialogue, a forum on emerging, critical, and cyber technologies, Prime Minister Narendra Modi said; “Take cryptocurrencies, such as Bitcoin for example. It is important that all democratic nations work togethter on this and ensure it does not end up in the wrong hands, which can spoil our youth.”
Five days before that, PM Modi had held a meeting on cryptocurrencies with senior officials.
A top government source said that the legislation on cryptos is in the works and the key element would be that if there is gain or income from cryptocurrencies, then it is likely to be taxed as per the rules of capital gains and it may attract the usual GST, as most services are.
Revenue Secretary Tarun Bajaj said that “in terms of income tax, som epeople are already paying capital gains tax on the income from cryptocurrency, and in respect of Goods and Services Tax (GST) also, the law is “very clear” that the rate would be applicable like those in the case of other services.
“We will take a call, I understand that people are already paying taxes on it. Now that it has really grown a lot, we will see whether we can actually bring in some changes in the law or not. But that would be a budget activity. We are already nearing the Budget; we have to look into it at that point in time,” Bajaj told PTI in an interview.
Asked if a provision for TCS (Tax Collected at Source) could be introduced for crypto trading, Baja said, “if we com eup with a new law, then we will see what is to be done. But yes, if you make money, you have to pay taxes. We have already got some taxes. Some have treated it as an asset and paid capital gains tax on it,” he said.
Asked whether people involved in cryptocurrency trading would be categorised as facilitators, brokers, and trading platforms, and how the taxation would be done under GST, Baja said “There would already be such things available in other services also. So, whatever Gst rate they are taxed at, that will be applicable to them.”
“They have to get themselves registered. The GST law is very clear, if there is an activity, if there is a broker who is helping people and charging a brokerage fee, GST would get charged,” he said.
Reserve Bank’s Reservations!
The RBI has been voicing its concerns about cryptocurrencies since 2017. In July 2017, the then RBI Governor Urjit Patel had told a parliamentary panel that the RBI was keeping a close watch on transactions involving cryptocurrencies.
The members of the panel, including Bharatiya Janata Party MP Nishikant Dubey and BJD’s Bhartrihari Mahtab, had said that the rise in the usage of virtual currencies is a matter of concern as it is difficult to establish the source of funds.
Patel had informed the members that the RBI had set up an inter-disciplinary committee to discuss the legality of cryptocurrencies.
An RBI circular dated April 6, 2018 had prohinited banks and entities regulated by it form providing services for virtual currencies. However, on March 4th, 2021, the Supreme Court set aside the circular.
RBI Governor Shaktikanta Das had recently stated that the RBI had major concerns around cryptocurrencies, which, over time, have been conveyed to the government.
Despite the tall claims made by the Blockchain and Crypto Assets Council (BACC) and Confederation of Indian Industry (CII) last Tuesday, Shaktikanta Das, at an SBI event, virtually challenged all the claims and demands of the cryptocurrency stakeholders.
“I would like to reiterate that the number of accounts is exaggerated in the sense that about 70%-80% of accounts being cited are small accounts of 1,000-2,000 INR and even 500 INR. So, anecdotablly, and we have a lot of feedback, that while credit and incentives are being procided for account opening, the amount in these ranges between 500-2,000 INR,” he said.
The RBI chieg said he agreed that the value of trading in cryptocurrencies had gone up but “when the central bank says we have serious concerns from the macro-economic and financial stability point of view, then there are serious issues involved.”
“I have yet to see serous, well-informed discussions in public space. At this time, the RBI, as a Central Bank, which is entrusted with the task of maintaining financial stability, after due internal discussion, says there are serious concerns, then there are deeper issues needing much deeper discussions,” Shaktikanta Das said.
The Supreme Court in early March 2020, nullified the RBI circular banning cryptocurrencies.
The work on the legislation to regulate cryptocurrencies and tax the earnings from it is a sign that the Centre feels that the RBI’s objections are too stringent and India’s stand on crypto needs to emulate the moderate regulations of European countries and not the Chinese model.
Shift in Government Position:
Just before the Budget in January this year, the government had released a list of bills for the session, including one titled “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.”
The mandate of the Bill was said to “create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of india. The Bill also seeks to prohibit all private cryptocurrencies in India.”
The Bill then was based largely on the recommendations of the SC Garg Committee formed by the Department of Economic Affairs, Ministry of Finance. The committee, in its report titled “Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies,” had even proposed banning cryptocurrencies.
The Committee noted with concern the mushrooming of cryptocurrencies almost invariably issued abroad and numerous people in India investing in these cryptocurrencies.
The report categorically said, “All these cryptocurrencies have been created by non-sovreigns and are, in this sense, entirely private enterprises. There is no underlying intrinisic value of these private cryptocurrencies, due to which they lack all the attributes of a currency.”
The other point the report made was that there is no fixed nominal value of these private cryptocurrencies, i.e. neither act as any store of value nor are they a medium of exchange. Since their inception, cryptocurrencies have demonstrated extreme fluctuations in their prices.
There was a sense in the market following the report of the Garg Committee that the date of cryptocurrencies was sealed as it had laid down that the private cryptos should not be allowed as they cannot serve the purpose of a currency because private cryptocurrencies are inconsistent with the essential functions of money/currency. Hence, private cryptocurrencies cannot replace flat currencies.
The committee’s other significant recommendation was that the government should keep an open mind regarding an official digital currency. It proposed the settin gup of a group by the Department of Economic Affairs, with the participation of the representatives of the RBI, MeitY, and DFS for examination and development of an appropriate model of digital currency in India.
If the official digital currency was to get the status of legal tender, the committee proposed that the Reserve Bank of India should be the appropriate regulator of such digital currency by virtue of its powers under Section 22 of the RBI Act.
The bill based on these recommendations in January this year brought back the jitters of April 6, 2018, when the RBI had barred banks from dealing with cryptos.
Crypto players flexing muscle:
The Indian crypto exchanges and industry bodies recently put out a joint advertisement that claimed crypto investments by Indians had crossed 6 lakh crore INR and the number of inestors had grown exponentially to over 10 crores.
Although a large number of these investments are said to be micro and small, the government is not prepared to go for a tough clampdown.
Last Monday, the Standing Committee on Finance, headed by ex-minister of State for Finance Jayant Sinha, met the representatives of crypto exchanges, Blockchain and Crypto Assets Council (BACC), CII and (Associated Chamers of Commerce and Industry of India) ASSOCHAM among others.
The representatives had made a strong pitch for regulations and clear ground rules for operations. While the committee members had flagged serious concerns and the need for regulation, none pushed for a ban.