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Position as on: 05 May, 2021
The Ministry of Corporate Affairs, Government of India, amended Schedule III of the Companies Act, 2013, with effect from 1st April, 2021, vide notification dated 24th March, 2021 (“the Amendment”). Companies will now have to disclose details such as amount of digital currencies (“digital currency” or “cryptocurrency”) held as on the reporting date, deposits or advances from any person for trading or investing in digital currencies and profit or loss on transactions involving cryptocurrencies, under the head “General Instructions for Preparation of Statement of Profit and Loss” in Paragraph 11 ‘Additional Information’.
The Amendment followed remarks from the Finance Minister, Nirmala Sitharaman, assuring digital currency stakeholders that India will not shut all options and will leave a window open for experiments in the digital currency space. The Finance Minister also noted that a lot of work is going on in the realm of fintech and blockchain in India and the Government will encourage this by adopting a calibrated position in the area of blockchain in particular, which is the underlying technology behind digital currencies.
It is important to understand that digital currencies are a form of virtual assets that have multifaceted use cases and are utilized for purposes other than just digital payments or investments. The reason why this should interest the Government is the way these virtual assets operate at present and the effect that lack of understanding or absence of regulatory compliances may have. Initially, virtual currencies were ideated as digital currencies complementing, or perhaps, replacing fiat currencies. With an exponential spurt in the development of blockchain, the use cases of these virtual assets have developed into providing real-world problem solving digital tools and digital infrastructure and not just as payment settlement mechanisms or investments.
It is vital to understand the manner in which virtual assets operate, i.e. their utility, will have a bearing on how they should be regulated. Ergo, the Government should act quickly to understand and differentiate between the various virtual assets before they are brought under the ambit of any laws and regulations, such as the Amendment at hand. Singapore’s regulators have taken welcome steps in categorising virtual assets, which have attracted new projects to its shores.
Notwithstanding the above, this Amendment is likely to bring transparency in reporting of digital currencies and should clear the air surrounding digital currencies to some extent. The Government’s move may also boost institutional adoption of digital currencies. Globally, major companies such as Tesla and MicroStrategy have purchased large amounts of bitcoin as stores of value, alternatives to gold or dollar. The Government of India still needs to establish how these digital currencies will appear on the balance sheets here in India.
A Bill banning private cryptocurrencies and for introducing Central Bank Digital Currencies (“CBDC”), which is a digital currency that holds the same value as fiat currencies issued by a country’s central bank, unlike private cryptocurrencies which are issued without a central bank backing and are issued and traded on exchanges, was a part of the Lok Sabha List of Business for the Monsoon Session of the Parliament earlier this year. This Bill never came to be introduced. Several jurisdictions are exploring and experimenting with CBDCs. Moreover, Facebook’s Libra project cajoled several Central Banks to probe and work around a common government-backed stable coin for their respective jurisdictions.
While the Amendment seeks to bring under its purview the balance sheet treatment of digital currencies, it has left several questions unanswered. After the Amendment, the Government has made its intentions clear that the gains arising from the transfer of digital currencies and services of cryptocurrency exchanges are liable to be taxed. Union Minister of State for Finance, Anurag Thakur, in response to a question raised by Priyanka Chaturvedi, MP, in Rajya Sabha on collection of income tax on cryptocurrency earnings stated that “the gains arising from the transfer of crypto currencies/assets is liable to tax under a head of income, depending upon the nature of holding of the same.”
From this, it may be inferred that income arising from trading in cryptocurrency may be considered as income from business and could be taxed under "Profits and Gains from Business". On the other hand, if the Government decides to define cryptocurrencies as a capital asset, the same could be taxed under the head of "Capital Gains". Depending upon the characteristics of the digital currency, it could also be taxed under the "Income from Other Sources" head. Additionally, services related to digital currencies will also come under the ambit of GST legislation as the supply of any service, if not specifically exempted, is taxable under GST.
This Amendment is a welcome step for the evolving legal framework governing digital currencies in India. Since the Government has no data on digital currency earnings of Indian investors, this Amendment will facilitate it in collecting information on digital currency holdings in India, which should aid it in formulating a regulatory framework for the same. That being said, given the industry’s rapidly changing demands, the regulatory framework to be built by the Government should cater to the fast-paced nature of the industry.
It is worthwhile to note the findings of the “Group of 30” (G-30) report titled Digital Currencies and Stablecoins: Risks, Opportunities, and Challenges Ahead, which provides an evidence-based study that seeks to guide central banks and regulators as they consider the policy choices presented by new payment technologies and the entrance of various technology players into the global payments arena. Questions surrounding improvement in the efficiency of payment systems, safeguarding financial stability, financial inclusion, investor protection, and countering illicit activities have also been dealt with in this report. The report also tries to bring home the idea that regulators must ensure that there is a balance between protecting individual data versus the government’s imperative attitude to enforce laws and regulations, and levy taxes when it comes to regulating digital currencies and stablecoins.
This post was authored by Abhinav Goyal, Aparna Sridharan and Gazal Ghai
The authors may be contacted at abhinav@sigmachambers.in
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