► Date : May 31, 2022

EXECUTIVE SUMMARY:

In the fast-growing age of technological progressions and Globalisation, one thing is drawing the attention of finance experts, banking authorities, and several New Investors. That is none other than "Cryptocurrency".

"Cryptocurrency is a form of decentralized digital currency secured by Cryptography and based on blockchain technology. The decentralized structure of cryptocurrency allows them to exist outside the control of governments and central authorities."

The prevalence and popularity of Virtual Currencies such as Bitcoin, Ethereum, Cardano, etc. have considerably increased globally in the recent past. Various Investors from India are attending to this phenomenon and wanting to get a fair share of this euphoria. 

THE BEGINNING OF CRYPTOCURRENCY:

Before the contemporary iterations of cryptocurrencies, numerous attempts were made to bring digital currency into existence but didn’t gain widespread traction. Those include ideas in the early 1980s in Netherlands and United States. The earliest noteworthy digital currency may be 'Digicash', which was unable to convince banks to adopt its technology and eventually filed for bankruptcy in 1998.

Even though many efforts were made to create a digital currency for over a decade, The First fully functional Cryptocurrency namely "Bitcoin" was introduced in 2009 in the form of a 'White paper' that explains the foundations of Blockchain and Bitcoin created by "Satoshi Nakamoto".

After its introduction in 2009, the total value of Bitcoin surpassed $1 Trillion in march 2021, completely reversing the opinion of so many financial institutions and new investors who were initially reluctant to the concept of Digital Currency. Due to the tremendous success of Bitcoin, Various new cryptocurrencies were released using the same blockchain technology termed 'Alt Coins' or 'Alternate Coins'. The most noteworthy Bitcoin alternative is Ethereum, which has the second-largest market cap in the crypto market created by Vitalik Buterin a 27-year-old Canadian programmer. Currently, there are more than 5000 Cryptocurrencies in existence each of which was created to address or resolve the existing challenges of Bitcoin.

LATEST DEVELOPMENTS IN CRYPTOCURRENCIES:

The Most recent development in Cryptocurrency adoption is that El Salvador, a small coastal country in Central America announced and passed a bill that makes Bitcoin a Legal tender in that country and became the first country in the world to accept Bitcoin as a legal tender. This move took the world by storm and many countries were looking at the precedent set by El Salvador by adopting a digital currency as Legal tender. Many Institutional investors, investment banks, Technology Companies have continued to support Bitcoin by including the same in their portfolios. For Example, Tesla a global tech giant founded by Elon Musk announced a historic $1.5 billion investment in Bitcoin in February 2021, accounting for 8% of the company's $19.4 billion in cash and liquid assets.

CRYPTOCURRENCY TRADING IN INDIA:

The growing interest in cryptocurrency in India led to the rise of many crypto exchange platforms like WazirX, Coinswitch Kuber, CoinDCX GO, etc., which have made it very easy to buy and sell cryptocurrencies in the country. Unlike stock markets, all of these platforms work 24x7. which enables the users to invest and withdraw money on any day of the week and at any time of the day. Currently in India, Over Rs, 10,000 Crores were invested by many investors in various cryptocurrencies trading on many platforms.

LEGAL POSITION OF CRYPTOCURRENCIES IN INDIA:

Even though many countries were positive about using cryptocurrency in their respective financial systems, the situation in India is somewhat cautionary regarding the usage of cryptocurrency. Through a circular in 2018, the RBI had advised the entities regulated by it not to deal with cryptocurrencies or provide services for facilitating any person or entity in dealing with settling them. However, the Supreme court set aside the RBI Circular on March 4, 2020. In Budget 2022, Finance Minister Nirmala Sitharaman introduced tax on Digital assets. As of now, the government does not consider cryptocurrencies as legal tender.

FUTURE OF CRYPTOCURRENCY IN INDIA:

With the exponential growth and advancements in the field of technology in India, especially with the emergence of COVID-19, the fintech sector has been on a path of constant rise and many investors started investing in Cryptocurrency. 

Even in a time of crisis, many people from all over the world came forward to help India to fight against the COVID-19 pandemic by Donating huge amounts in Cryptocurrencies. Recently, Vitalik Buterin, the Founder of the second-largest Cryptocurrency in the world i.e., Ethereum donated Cryptocurrency worth approximately a Billion Dollars to the India Covid Crypto Relief Fund to help India fight against COVID-19 Pandemic.

After the Supreme Court judgment, the Indian government has taken an encouraging step towards regulating digital currencies in India. According to the latest amendments to the Schedule III of the Companies Act, 2013, the Government of India mandated the companies to disclose their profit or loss on transactions involving cryptocurrency, investments in cryptocurrencies during the financial year. This step by the government was considered a positive move towards regulating cryptocurrencies in India.

The Parliament, in the next Lok Sabha session, is proposing to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 ("New Bill"). The New Bill seeks to create a facilitative framework for the creation of the official digital currency to be issued by the RBI. The New Bill also seeks to prohibit all private cryptocurrencies in India. However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

In Finance Bill 2022, Hon’ble Finance Minister Nirmala Sitharaman has introduced tax on Virtual digital assets (VDA). VDAs mainly include crypto currencies, non-fungible token (NFT), etc. Prima facie, this excludes digital gold, central bank digital currency (CBDC) or any other traditional digital assets, and hence aimed at specifically taxing cryptocurrencies.

ACCOUNTING OF CRYPTOCURRENCY IN INDIA:

As of today, there is no accounting standard guiding on how to recognize, Measure and present Cryptocurrency in financial statements. Hence, we are left with the option to refer the existing standards to deal with Cryptocurrencies. The Main practical issue with Cryptocurrency Accounting is the classification of Cryptocurrency. Having many uses cases cryptocurrency cannot be classified under a single type of asset or a commodity or investment. Cryptocurrency's use cases are numerous and many entities use them in different ways. For example, Tesla is holding Bitcoin in its treasury as an investment whereas the second largest Cryptocurrency "Ether" is running the whole ecosystem of Decentralised Finance and Smart contracts on Ethereum blockchain network. Likewise, there are many different use cases and classifications applicable to Cryptocurrencies. Considering the various possibilities and use cases cryptocurrency can be classified as one of the below:

a) Cash & Cash Equivalent: Currently, in India Cryptocurrencies are not a recognized medium of exchange because it does not represent a legal tender. In addition to this Cryptocurrencies are subject to Significant price fluctuation which eliminates the possibility of them being classified into Cash & Cash Equivalents as defined in Ind AS 7 because they cannot readily be exchanged for any good or service.

b) Financial Instrument: Some might argue that cryptocurrency should be accounted as a financial asset in accordance with Ind AS 119. However, it does not meet the definition of a financial instrument because it does not represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Cryptocurrency is not a debt security, nor an equity security because it does not represent an ownership interest in an entity. Therefore, it appears cryptocurrency should not be accounted for as a financial asset.

c) Intangible Asset: Cryptocurrency meets the closets criteria of Ind AS 38, Intangible Assets. This standard defines an intangible asset as an identifiable non-monetary asset without physical substance. 

Ind AS 38 states that "an asset is identifiable if it is separable or arises from contractual or other legal rights. An asset is separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability". 

Therefore, it appears that cryptocurrency meets the definition of an intangible asset in Ind AS 38 as it is capable of being separated from the holder and sold or transferred individually. An entity will also need to assess whether the cryptocurrency’s useful life is finite or indefinite. An indefinite useful life is where there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. It appears that cryptocurrencies should be considered as having an indefinite life for Ind AS 38. An intangible asset with an indefinite useful life is not amortized but must be tested annually for impairment.

d) Inventories: Sometimes entities hold cryptocurrency for sale as a part of the ordinary course of business. In those cases, it might be appropriate to account for cryptocurrencies in accordance with Ind AS 2. Ind AS 2 defines inventories as "assets:

• held for sale in the ordinary course of business
• in the process of production for such sale, or
• in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Normally, this means the recognition of inventories at lower the cost or NRV. However, if the entity acts as a broker of cryptocurrencies, then Ind AS 2 states that their inventories should be valued at fair value less costs to sell. This type of inventory is principally acquired to sell in the near future and generate a profit from fluctuations in price. Thus, this measurement method could only be implemented in very thin cases where the business model is to sell cryptocurrency shortly to generate a profit from fluctuations in price.

TAXATION OF CRYPTOCURRENCY IN INDIA:

In Budget 2022, The Finance Ministry has proposed a 30% tax on the exchange of all virtual assets, including cryptocurrencies and non-fungible tokens. It has also highlighted that the Benefit of basic exemption limit is also not available. No deduction in respect of any expenditure other than cost of acquisition shall be allowed. Also, TDS at 1% shall be deducted on the transaction value from 1 July subject to certain conditions. Though details about various scenarios of income from cryptocurrencies is not specified explicitly in the budget 2022, various scenarios in which digital assets can be taxable are as follows:

Scenario A: Cryptocurrency Mining

The cryptocurrency created by mining is self-generated capital assets. Subsequent sale of such cryptocurrency would, in the ordinary course, give rise to capital gains. However, the cost of acquisition of a cryptocurrency cannot be determined as it is a self-generated asset. Moreover, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C. Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of cryptocurrency. This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act.

Scenario B: Transfer of Cryptocurrency held as an investment for Consideration

If cryptocurrency is held as an investment and is transferred in exchange for real currency, the appreciation in value would give rise to capital gain which would be taxed at a flat rate of 30% (Specified on Budget 2022). No deduction in respect of any expenditure other than cost of acquisition shall be allowed and a TDS at 1% shall be deducted.

Example: A Purchase Cryptocurrency in August 2020 at Rs. 10000. He Transfers his Cryptocurrency on June 2022 at Rs. 70000. On this transaction TDS of Rs. 700 should be deducted. The gain on this transaction will be considered as Rs. 60000 (70000-10000). Which is taxable at 30%. i.e Rs.18,000. Of this Rs. 700 TDS was already deducted. Hence, Balance tax payable is Rs. 17,300

Scenario C: Cryptocurrency held as stock-in-trade being transferred in exchange for real currency

The income arising out of bitcoins trading activity would give rise to income from business and accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates.

Scenario D: Cryptocurrency being received as consideration on sale of goods and services

Recently, World's biggest Electronic Car manufacturer Tesla started accepting Bitcoins as a consideration for their electric cars. But due to energy consumption concerns, Tesla temporarily stopped accepting Cryptocurrency as a consideration. If this Scenario ever occurs in India Cryptocurrency being received so shall be treated on par with receipt of money. It would constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head profits or gains from business or profession. As regards the disclosure requirement of bitcoins in the income tax return forms, there continues to be a lack of clarity. 

CONCLUSION: NEED FOR A WELL-STRUCTURED FRAMEWORK AND REGULATION 

It is well established that there exists a lack of clarity concerning cryptocurrency regulation in India even though crypto trading platforms already started enabling trading of cryptocurrency to the whole of India. The Cryptocurrency regulation in India requires a well-structured framework with due regard to the statute, the stakeholders involved, and the possible effects on the economy as a whole. There are many other countries such as Japan, Australia, Russia that have made constructive regulations towards the usage of cryptocurrencies. Therefore, it is crucial to understand and consider the models embraced by other countries and implementing a tailor-made framework without imposing a ban on cryptocurrency in its entirety would be a more beneficial solution keeping the interests of all stakeholders in mind. 

Footnotes & References

1. KPMG, Fintech in India – Global Growth Story, June 2016, https://assets.kpmg/content/dam/kpmg/pdf/2016/06/FinTech-new.pdf

2. National Strategy on Blockchain in January 2021, Government of India Ministry of Electronics and Information Technology, https://negd.gov. in/sites/default/files/NationalStrategyBCT_%20Jan2021_final_0.pdf

3. RBI Circular (DBR.No.BP.BC.104/08.13.102/2017- 18) https://rbidocs.rbi.org.in/rdocs/ Notification/ PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF

4. Lok Sabha Bulletin Part – II, General Information relating to Parliamentary and other matters, http://loksabhadocs.nic.in/bull2mk/2021/29012021.pdf

5. Finance Budget 2022

*****

CA Rajesh Pilleda