By Mukesh Bhutani and Shankey Agrawal
Since the popularisation of virtual currency, particularly cryptoassets, governments across the globe have been grappling with disparate measures to regulate them. Its decentralised nature ensures that the transactions remain largely anonymous and presents a daunting challenge for regulators. The cryptoasset is an encrypted data string denoting a unit of currency, monitored by a peer-to-peer network labelled as blockchain. This also serves as a (secure) ledger of transactions for trade and transfer, with no oversight by any sovereign governments. The Reserve Bank of India (RBI) is on record to be amongst the first (in 2018) to express its reservations until the Supreme Court in 2020 set aside its directives to ban virtual currencies on grounds of legislative competence. RBI’s U-turn pursuant to the apex court’s order, empowering banks to undertake overseas remittances, subject to requisite KYC, anti-money laundering process etc., was viewed as a result of inadequate understanding of pros and cons. Though RBI remains apprehensive and suspicious of cryptocurrencies, the SC, in the wake of several frauds, has questioned the government to clarify its stand. In the meantime, crypto startups continue to grow in anticipation of a bill that the ministry of finance was expected to introduce in the 2021 budget session. It was widely speculated that the proposed bill would prohibit all private parties from engaging in cryptoassets and will provide a framework for the launch of an official digital currency denominated in the rupee. While India’s regulatory regime seems lacking a direction and its taxation policy evolves, OECD recently released a guide providing standardisation of rules for reporting crypto transactions. OECD’s Crypto-Asset Reporting Framework (CARF) gives detailed guidance to enhance transparency in reporting tax information. Besides, it thrusts the onerous due-diligence procedures on crypto exchanges and financial intermediaries to identify and report crypto users.
The guidance’s apparent aim is to address the anonymity of parties and obligations of crypto service providers across jurisdictions. Crypto traders, exchanges, and governments are divided on establishing a financial trail. Governments in the past decade have struggled to accomplish a crucial crypto policy objective to trace illegal activities and measure them to tax the gain. CARF is a multilateral initiative to facilitate countries to have more visibility on transactions and infuse the much-needed credibility and transparency in trade.
Cryptoassets have remained a contentious issue despite some nations and certain e-commerce transaction entities recognising its legitimacy, resulting in varied approaches for regulating and taxing them. The United States and Singapore treat profits on such transactions as capital gains. On the other hand, China has imposed a ban. In the 2022 Budget, India introduced a tax on crypto trades at a maximum marginal rate of 30% plus surcharges, besides a 1% withholding tax obligation on the gross value of transactions. It is widely anticipated that India will levy GST on rates like gambling, betting etc. The stringent regime is supported by a public policy dimension of such investments being counted amongst the most risky and volatile class of assets. The tax regime in place lacks clarity on various fronts including income characterisation from a tax treaty standpoint and is viewed at variance to domestic tax regimes across various jurisdictions. Though tax is a sovereign function, achieving a degree of consistency on rates and scope is important from a competitiveness standpoint. Nevertheless, India’s withholding tax mechanism is viewed as a robust stance to track such transactions, given that it’s now thrust upon the exchanges to ensure strict compliance on reporting. Reconciling such tax policy differences and establishing a uniform standard may pose a major hurdle in formulating a bilateral or multi-lateral norm.
There are critical differences between India’s domestic and OECD’s proposed framework. The scope of applicability of reporting standards is broader under the OECD framework, with an onus to report largely thrust upon the crypto exchanges. Certainly, a multi-lateral approach will facilitate identifying cross-border transactions, which may otherwise not get reported in India. Though not a member of the OECD, India has implemented many of the OECD recommendations, which it finds in its best interest, including its active participation in developing a multilateral framework for BEPS Action Plan on digital taxation.
India maintains an independent approach and is not bound to follow OECD recommendations on CARF. While the report seems persuasive, it is to be assessed how India aligns itself with its implementation. Introducing a framework to supplement existing reporting requirements could be a stepping stone for formulating a comprehensive mechanism to usher in a regulatory framework. RBI also recently issued a concept note on a Central Bank Digital Currency (CBDC) based on cryptographic algorithms. Though the ministry of finance is expected to play a pivotal role in policy formulation, RBI as the custodian of currency has a role cut out and a robust regulatory regime shall need coordination.
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From a policy perspective, India should engage in a comprehensive stakeholder consultation to gauge industry feedback for putting a robust framework in place. The CARF requirements could be fine-tuned for domestic regime and crypto exchanges to cater to cross-border transactions. More importantly, given the multiplier benefits of blockchain technology and a tax policy stance, which are perceived as harsh, it needs reflection. Most observers believe that crypto players could find inadequate policy guidance, a sin-tax regime, and regulatory hurdles as roadblocks. Crypto players find India as a growing market. While regulatory intervention to prevent frauds and money laundering is a given, assessing the economic impact of blockchain technologies and B2B use of crypto needs an assessment such that the policy stance and an opportunity to align with a multilateral framework is not missed.
Writers are Partners at BMR Legal. Views are personal.