The Crypto Question

(Sansad TV: Perspective)

Feb 23: The Crypto Question – https://youtu.be/WHZVecBPGRg 

TOPIC:

• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
• GS-3: Science and Technology- developments and their applications and effects in everyday life. 

The Crypto Question

Context: While Bitcoin started more than a decade back in 2008, total market capitalisation of all cryptocurrencies was only $20 billion in early 2017. This went up to $289 billion in next three years and thereafter exploded to reach a peak of $2.9 trillion in November 2021. In the last three months it has again witnessed a sharp decline. 

• As of today the total number of cryptocurrencies is at 17,697 and the total number of crypto exchanges is 462. 
• Currently, there is no regulation or any ban on the use of cryptocurrencies in India. 
• The Reserve Bank of India’s order banning banks from supporting crypto transactions, was reversed by the Supreme Court order of March 2020. 
• While the RBI has repeatedly underlined its strong view against cryptocurrencies, saying these pose a serious threat to the macroeconomic and financial stability of the country, Govt. of India is working on a legislation for regulation of this sector. 

Budget 2022

• Finance Minister in her Budget speech this year has proposed to introduce a digital currency in the coming financial year for which RBI is soon expected to carry out pilot studies. 
• Removing all doubts on whether cryptocurrencies would become a legal tender or a medium of exchange in the future or not, the budget clarified that the Government of India doesn’t consider cryptocurrency as a currency, but shall treat it as a virtual digital asset. In other words, the Government of India would treat cryptocurrency as an investment.
• While presenting the Union Budget 2022 government proposed a tax of 30 per cent on virtual assets, effectively legitimizing trading of private cryptocurrencies and non-fungible tokens. This is broadly in line with the Centre’s plans to have a fiat digital currency, while disallowing use of private virtual coins as legal tender.

Taxing Transactions in Cryptocurrencies 

The power to levy taxes is prescribed under Article 246 which grants power to the Parliament as well as state legislatures to impose taxes. Article 265 provides that no tax can be imposed or collected without the authority of law. Today, with the rise of cryptocurrencies and its underlying technology, the world stands at the helm of another such revolution. Cryptocurrencies like bitcoin are decentralised, digital currencies relying on a peer-to-peer network which operates without the need for a third-party intermediary like the Reserve Bank of India. Coupled with lack of regulatory guidance, its unique technical aspects create huge complications in its taxation.

• These clarifications about taxation of cryptocurrencies aka virtual digital assets, as the government wants it to be addressed, come at the right time. 
• It especially becomes extremely important because around 10 crore individual investors have invested around Rs 6 lakh crore in various cryptocurrencies, as per the advertisement issued by The Blockchain and Crypto Assets Council which is a part of the Internet and Mobile Association of India. 
• The taxing of ‘virtual digital assets’ or crypto currencies will help the Income-Tax department measure the “depth” of this trade in the country.
• The income-tax department and the income-tax Act only looks at whether the transactions that you have entered into are resulting in income. 
• Taxing crypto currency under the new legislation does not attach any legality.
• When an entity declares any profit or surplus on the digital trade, then they also have to say where they have got the money to invest from and, if the investment is proper and justified, then the surplus will be taxed.
• The taxation will also help us know if the investment is contaminated or illicit, if he/she is putting unaccounted income or it is a ‘benami’ of somebody else, then the consequences will follow.

Challenges:

• Absence of explicit tax provisions has led to ambiguity and uncertainty: Lack of clarity as to whether the GST on crypto transactions is applicable only on Rupee transactions alone or even on transactions through crypto currencies.

• Difficult to impose tax due to cross-border transactions: Usually, taxpayers may cryptocurrencies and store in online wallets, on servers outside India. In such cases, it becomes difficult to pinpoint which jurisdiction’s tax laws would become applicable. 
• Anonymous transactions: The identities of taxpayers who transact with cryptocurrencies remain anonymous and hence it becomes quite difficult to keep a tab on the individuals who are trading in cryptocurrencies. Usually, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.
• Difficult to track down on tax evaders: One of the most efficient enforcement tools in the hands of Income Tax Department is CASS or ‘computer aided scrutiny selection’ of assessments, where returns of taxpayers are selected inter alia based on information gathered from third party intermediaries such as banks. 

How do Cryptocurrencies work?

• Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions.
• So, instead of relying on traditional financial institutions like RBI who verify and guarantee your transactions, cryptocurrency transactions are verified by the user’s computers logged into the currency’s network.
• Cryptocurrency mining is the process in which transactions between users are verified and added to the blockchain public ledger. 
• The process of mining is also responsible for introducing new coins into the existing circulating supply and is one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a third party central authority.

The Way Forward

• Smart regulation is preferable, as a ban on something that is based on a technology of distributed ledger cannot be implemented for all practical purposes. Even in China, where cryptocurrencies have been banned and the Internet is controlled, trading in cryptocurrencies has been low but not non-existent. The government must resist the idea of a ban and push for smart regulation.
• Govt. should impose a 1 per cent tax deduction at source (TDS) of transactions above a monetary threshold to trace the transition. The US government has made it mandatory for all tax payers and third party intermediaries (Exchanges, wallet providers, miners etc) to disclose all the cryptocurrency related transactions.
• Explicit and Unambiguous provisions should be incorporated in the Income tax act. The existing international legal framework for exchange of information should be strengthened to enable collecting and sharing of information on crypto transactions.

Conclusion

• The tax department is entering into the digital or virtual asset side at a time when the policy itself is being worked out so this is certainly the right time for the department to have entered the market. Only legislation will help us in knowing as to who is investing, how much is being invested, the quality of the investment, the nature of investment and whether people are making profits or losses.
• The country should regulate these transactions in a manner that permits a reasonable balance between consumer security and legitimacy. A streamlined tax regime will be essential in the formulation of a clear, constructive and adaptive regulatory environment for crypto currencies.

Can you answer the following questions?

1. What are your views on the recent budget announcements on taxing transactions in cryptocurrencies? Substantiate your views.
2. How have the markets for cryptocurrencies evolved in recent months? What are the regulatory concerns related to cryptocurrencies? Discuss.