TerraLex Cross-Border Guide to Crypto Assets

India does not currently have any specific legislation which covers the generation, use, nor regulates transactions involving ‘crypto assets’. Although ‘crypto assets’ have been defined under other legislation (e.g., tax legislation), owing to the absence of a specific legislation, no single definition of crypto assets is currently available. In India, a draft legislation banning cryptocurrencies has also been proposed.

Existing Legislation

With respect to existing legislations, for example, the direct tax legislation (i.e., the Income Tax Act, 1961) has been amended this year to define “virtual digital assets” to mean the following:

any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; a non-fungible token or any other token of similar nature, by whatever name called; any other digital asset, as the Central Government may, by notification in the Official Gazette specify: Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

For the purposes of this clause, (a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify; (b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999.”

As may be gathered from above, virtual digital assets are very broadly defined under the Income Tax Act. While providing the scope of what would be a crypto asset/virtual digital asset, the above definition specifically also includes non-fungible token within the scope of virtual digital assets.

The Central Board of Direct Taxes (“CBDT”) has vide a notification excluded certain virtual digital assets from the definition provided above. Specifically, the following are not to be considered as digital virtual assets:

• Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
• Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
• Subscription to websites, platforms, or application The Board has also notified that an NFT whose transfer results in transfer of ownership of underlying tangible asset would not qualify as a digital virtual asset. The Board also has clarified that the transfer of ownership of such underlying tangible asset is legally enforceable.

Proposed Legislation

An Inter-Ministerial Committee constituted by the Central Government on Virtual Currencies recommended a law banning cryptocurrencies in India and proposed a draft ‘Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019.’ The scope of the proposed Bill covers cryptocurrencies, but not other crypto assets. Specifically, the proposed Bill defines cryptocurrencies in line with the definition of virtual digital assets, as follows:

“any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.”

Basis the stakeholders' comments that the definition of cryptocurrency in the 2019 Bill was too broad and considering the increasing investment transactions by Indian residents in cryptocurrencies, the Government introduced a revised Bill referred to as The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (the "Bill") before the Indian parliament. The Bill sought ‘to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India, as well as to prohibit all private cryptocurrencies in India'. However, the Bill continues to remain pending.

As described previously, India has not enacted any specific legislation governing or regulating crypto assets. Therefore, activities (such as using, transferring, selling, mining, generating, holding, dealing, issuing, transferring, or disposing) involving any crypto asset are not barred in India yet. The Government of India on numerous occasions has declared that cryptocurrencies are not legal tender. No such specific observations have been made with respect to other forms of crypto assets.

It is pertinent to note that cryptocurrencies have been the subject of government and executive action in the past. The Reserve Bank of India ("RBI") in 2018 had issued a circular prohibiting all entities regulated by the RBI (which would include all financial institutions operating in India) from rendering services in connection with cryptocurrencies or virtual currencies. This circular was later set aside by the Supreme Court in March 2020 on grounds of proportionality in their judgment in Internet and Mobile Association of India V. Reserve Bank of India.

In India, it is likely that crypto assets will be regarded as intangible moveable property and shall be governed by the general laws relating to acquisition and transfer of property. However, it may be noted that the legal position on this aspect is evolving.

There is no single legislation which governs or regulates crypto assets and related transactions in India. However, different regulatory authorities in India have released notifications/directions which directly or indirectly prescribe various criteria and regulations involving transactions relating to crypto assets. Some of them are highlighted below:

Crypto exchanges/businesses that are operating in India have to obtain standard registration and other required compliance requirements under the Companies Act, 2013 and its underlying rules. Transactions undertaken by such exchanges would be liable to tax (direct or indirect) as per the applicable laws (e.g., under the Central Goods and Services Tax Act, 2017). Crypto exchanges (i.e., platforms which allow transact in crypto assets in exchange of currency) are required to obtain tax-related approvals and registration from relevant tax authorities including necessary documentation like Permanent Account Number (PAN), a Tax Deduction and Collection Account Number (TAN), and a Goods and Services Identification Account Number (GSTIN). The Advertising Standards Council of India (ASCI), in February 2022 issued guidelines with respect to advertising and promotion of crypto assets in India. It mandates that all products and services related to virtual digital assets should carry the disclaimer “Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions,” such that it is prominent and unmissable for an average customer. The ASCI is a self-regulated advertising authority in India created for ensuring the protection of the interests of consumers.

The Ministry of Corporate Affairs has made it mandatory for companies dealing with cryptocurrencies to disclose profit or loss incurred on transactions, the amount of cryptocurrency they hold and deposits or advances from any person. Therefore, such companies dealing in cryptocurrencies are required to clearly disclose profit/loss and other details in the financial statements with regards to their crypto transactions and holdings.

Moreover, it is an industry practice for crypto exchanges in India to keep a general KYC (know your customer) related information of all the traders and investors registered on their platforms. KYC requirements forms the first stage of anti-money laundering due diligence requirements for the exchanges. Although the practice is fragmented at this stage, the government is planning to implement a uniform KYC requirement for crypto exchanges soon.

In case any foreign exchange is involved in transactions relating to crypto assets, provisions of the Foreign Exchange Management Act, 1999 may apply.

Since there is no direct regulation pertaining to the regulation of crypto assets in India, there is also no specific authority at present.

India is a member of the Financial Action Task Force (FATF). The anti-money laundering (AML) and Know-Your-Customer (KYC) requirements in the country are primarily shaped based on FATF recommendations to the member countries. Although FATF had issued a set of AML and KYC recommendations, India is yet to have specific AML and KYC regulations for cryptocurrency exchanges and other stakeholders in the ecosystem. It is expected that AML and KYC requirements specific to crypto-exchanges as and when framed will be in line with the recommendations of FATF.

In addition to the above, financial institutions in India are required to perform customer due diligence and record-keeping under the Prevention of Money Laundering Act, 2002 (PMLA). Under PMLA, all reporting entities (RE), which includes banking companies, financial institutions, intermediaries, or a person carrying on a designated business or profession, need to verify the identity of clients and any beneficial owners.

In terms of a notification dated on 7th March, 2023 issued under the PMLA, any person who carries out for or on behalf of another natural or legal person in the course of business, an exchange between VDA and fiat currencies, or one or more forms of VDA, transfer of VDA, safekeeping or administration of VDA or instruments enabling control over VDA, and participation in and provision of financial services related to an issuer's offer and sale of a VDA, fall within the ambit of the PMLA.

The Reserve Bank of India (RBI), the Indian central bank, issued the Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016 to prescribe KYC policies to include the following – (i) Customer Acceptance Policy; (ii) Risk Management; (iii) Customer Identification Procedures; and (iv) Monitoring of Transactions. RE are not permitted to open accounts in anonymous or fictitious names and are also required to undertake periodic money laundering and terror financing diligences. To this end, RE are permitted to perform video-based KYC with live GPS coordinates. RBI has issued clarifications that RE cannot prevent transactions associated with “virtual currencies” (a commonly used term for crypto assets), but still must continue AML and KYC due diligence as per existing law under PMLA.

The enforcement agencies are also closely following crypto asset-related transactions to assess any money laundering activities or other violations. One of the most notable examples include the investigation by the Enforcement Directorate of alleged FEMA violations by a leading Indian crypto exchange. The Enforcement Directorate during the course of their investigations observed that crypto exchanges permitted transactions between wallets hosted outside India and the wallets hosted by the cryptocurrency exchange without having KYC records for wallets sending inward remittances. This, as per the Enforcement Directorate violated AML norms.

While it may be argued that PMLA due diligence requirements should not apply to crypto exchanges since they are not recognised as RE, the Enforcement Directorate investigations as discussed above however impress that AML and KYC due diligence requirements should be implemented by crypto exchanges as a matter of abundant caution.

India has not enacted any specific legislation yet for blockchain based technologies, particularly for the financial services sector. As the adoption of blockchain technology in India has increased over the past few years, the government has taken a positive stance towards its utilization and identifying the potential of the technology. Currently, India is in the process of developing a legislative framework to govern implementation of blockchain based technologies in the financial services sector.

Direct Taxes Section 115BBH of the Income-tax Act, 1961 provides for tax on income from the transfer of VDAs. It provides that any income from the transfer of a VDA is taxable at a flat rate of 30%. Further, no deduction, other than the cost of acquisition, would be allowed in the computation of income from the transfer of a VDA. Section 115BBH(2)(b) further provides that no set-off of loss from the transfer of the virtual digital asset computed shall be allowed against income computed under any other provision of this Act to the assessee. Such loss shall not be allowed to be carried forward to succeeding assessment years.

Further, Section 194S of the Act provides for withholding tax obligations in relation to crypto assets transactions. It provides that the person making payment for the purchase of such a VDA is required to deduct tax at source at the rate of 1% at the time of credit or payment, whichever is earlier. Further, the CBDT vide Circular No. 13 of 2022 dated 22nd June 2022, and Circular No. 14 of 2022 dated 28th June 2022, has clarified various points in relation to withholding tax obligations on payments for purchase for VDAs. This Circular inter-alia provides that:

In a peer-to-peer (i.e., direct buyer to seller) transactions, the buyer is required to withhold tax.

Where transactions relating to sale and purchase of VDAs are taking place through Exchange and a VDA is owned by a person other than an Exchange, then the Exchange shall be responsible to deduct tax at source. But, where a broker is involved, then subject to the agreement between an Exchange and a Broker, the Broker shall be liable to deduct and deposit the withholding tax and the Exchange shall be required to file quarterly statement in Form No. 26QF.

Where transactions relating to the sale and purchase of VDAs are taking place through an Exchange and an Exchange owns the VDA, then the Exchange shall be paying taxes before the due dates and shall furnish a quarterly statement in Form No. 26QF.

Where the payment is in kind (i.e., transactions involving exchange of VDAs but not taking place on Exchange), then both parties to the transaction shall deposit tax in advance in respect of the VDA being transferred and thereafter, respective VDAs shall be exchanged. If the transaction is taking place on an Exchange, then the Exchange shall deduct 1% of a VDA being exchanged. Thereafter, the Exchange shall accumulate all the VDAs so deducted between 00.00 Hours to 23.59 Hours for the day and convert such VDAs into a fiat currency at 00.00 hours. Thereafter, it shall deposit this amount with the Central Government.

Indirect Taxes

In India, GST is leviable on the supply of goods or services. The term "goods" has been defined to mean every kind of moveable property. We are of the view that crypto assets qualify as property. Thus, crypto assets qualify as a supply of goods under GST at 18%. Having said the same, it is to be noted that the law around the levy of GST is ambiguous currently and the GST Council which decides on GST matters in India is deliberating on the classification of crypto assets as goods and services and the rate of tax applicable on the same

Under the Sale of Goods Act, 1930 defines the term ‘goods’ to mean every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. The General Clauses Act, 1897 (“Clauses Act”) defines the term ‘movable property’ to mean property of every description, except immovable property. Reference is also made to Section 2(22) of the Customs Act, 1962 which provides for an inclusive definition of ‘goods’ and brings within its purview any other kind of movable property. “”Goods” may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored, and possessed”.

Considering various legislation in India, which include the Sales of Goods Act, 1930, the General Clauses Act, 1897, and the Customs Act, 1962, it is likely that crypto assets would be considered as a movable property or also as ‘goods’. However, it is pertinent to note that there is no specific provision nor any jurisprudence on this point. The legal aspects concerning property rights of crypto assets is evolving and may change.

As per the rules of conflict of laws prevalent in India, the situs of intangible property is that of the domicile of the owner. Thus, the transfer and inheritance of crypto assets shall be governed with regard to the laws of the jurisdiction in which the owner of the crypto assets is domiciled.

Transactions involving crypto assets are no longer barred in India, although crypto assets/cryptocurrencies cannot be used as legal tender.

Generally, there are no provisions which prohibit the use of smart contracts. If the conditions prescribed under the Indian contract law are satisfied, a contract would be considered as valid. These include:

Free consent of parties

Parties are competent to enter into an agreement

Lawful consideration is involved

Contract is for a lawful purpose and is not expressly declared void.

As may be understood, a smart contract is characterized by way of self-executing code maintained within blockchain. It is unclear how courts will adjudicate disputes involving such smart contracts, particularly in light of the inalterable nature of the smart contracts themselves.

Yes. Security interest may be created over crypto assets by way of a mortgage, hypothecation, or a pledge, as per the laws applicable to each of them, by way of an instrument (though this is not mandatory). In India, generally, in respect of movable property, a security interest may be enforced without the intervention of courts. However, practically, the private key of the owner may be required to be provided to the creditor/or secured by an escrow to enable the creditor to effect the transfer of the crypto assets in the event of a default.

Inheritance tax is a tax which is levied at the time of inheritance of any asset. Inheritance tax is exempted under the provisions of Income Tax Act, 1961 wherein if any amount received under or given for the purposes of inheritance between related individuals will not be taxed in the hands of either party. However, liability under other tax legislations may still have to be assessed.

Yes, the Government has introduced the following Bills relating to the banning or regulation of crypto-assets in India:

• Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018
• Proposed Draft of a Bill for Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 (Proposed imprisonment of up to 10 years and penalty up to Rs 50 Crores)
• The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Text of the Bill is not available in public domain.)

According to the last draft of the 2019 Bill published by the Inter-Ministerial Committee constituted to study the issues related to Virtual Currencies, the Government intended to ban all cryptocurrencies and penalize their use under the proposed Bill except for a central government backed cryptocurrency (Central Bank Digital Currency). However, the Bill could not be considered and under the Lok Sabha Bulletin for the Winter Session of the year 2021 presented a fresh Bill. The draft of the 2021 Bill has not yet been made public. It appears that the 2021 Bill will seek to:

• Create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India
• Prohibit all private cryptocurrencies in India. The 2021 Bill, however, may provide certain exceptions to promote the underlying technology relating to cryptocurrency (or other types of crypto assets) and its uses/application.

The Government of India is still in a consultation phase to decide how the regulatory setup of crypto assets will look in India. Crypto regulation is still a grey area in India and there is no indication to show that the Government has any supranational view on crypto assets in India.

The legal domain surrounding crypto assets is evolving in India. On one hand, the Government is taxing the profits or income obtained by entities when transferring such cryptocurrencies, on the other hand the Government has failed to provide any legal status to it. While it appears that the government intends to ban cryptocurrencies, it is also imposing taxes without giving it any recognition. Much clarity is needed in the field of crypto regulation in India and the same would be clarified once the Government introduces the new draft of the Proposed Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.