Cryptocurrency Regulations in India

2.1 Evolution of Crypto Regulation in India

India's regulatory approach to cryptocurrencies has undergone significant evolution, marked by initial caution, an attempted ban, judicial intervention, and the current taxation-focused framework. Understanding this evolution is essential for any technology lawyer advising clients in this space.

Timeline of Key Regulatory Events

Year	Event	Impact
2013	RBI Press Release on Virtual Currencies	First official caution against VCs
2017	Inter-Ministerial Committee formed	Study on crypto regulation initiated
2018	RBI Circular (April 6, 2018)	Banks prohibited from crypto dealings
2020	Supreme Court IAMAI Verdict	RBI circular struck down
2022	Finance Act amendments	30% VDA tax introduced
2023	FIU-IND compliance requirements	VDA exchanges registered as reporting entities

2.2 The Supreme Court IAMAI Verdict (2020)

The landmark judgment in Internet and Mobile Association of India v. Reserve Bank of India [(2020) 10 SCC 274] remains the most significant judicial pronouncement on cryptocurrency regulation in India.

Supreme Court's Key Findings

1. RBI's Authority: The Court acknowledged that RBI has the power to regulate entities that pose a threat to the banking system, even if those entities are not part of the credit system
2. Proportionality Test: However, the Court found that RBI failed to demonstrate that less intrusive measures were considered before imposing a blanket ban
3. Absence of Damage: RBI could not show that regulated entities had suffered actual damage from crypto dealings, only potential risks
4. Article 19(1)(g): The circular violated the fundamental right to carry on trade, as it was disproportionate to the objectives sought to be achieved

Implications for Practice

• Cryptocurrency trading is not illegal in India
• Banks can provide services to crypto businesses (though many remain reluctant)
• Regulatory clarity through legislation remains pending
• RBI may issue fresh regulations following proper procedure

2.3 Virtual Digital Asset (VDA) Taxation Framework

The Finance Act, 2022 introduced a comprehensive taxation framework for virtual digital assets through Sections 2(47A), 115BBH, and 194S of the Income Tax Act, 1961.

Definition of Virtual Digital Asset - Section 2(47A)

Section 115BBH: Tax on Transfer of VDA

Aspect	Provision
Tax Rate	30% (plus applicable surcharge and cess)
Cost of Acquisition	Only cost of acquisition is deductible
Deductions Allowed	No deduction for any expenditure (including capital) except cost of acquisition
Set-off of Losses	No set-off of any loss from transfer of VDA against any other income
Carry Forward	Loss from VDA transfer cannot be carried forward
Gift Taxation	Gift of VDA taxable in hands of recipient (except specified relatives)

Section 194S: TDS on Payment for VDA

Section 194S mandates tax deduction at source on payments made for transfer of virtual digital assets.

Parameter	Provision
TDS Rate	1% of the consideration
Threshold (Individual/HUF)	Rs. 50,000 per year (if specified person); Rs. 10,000 otherwise
Effective Date	July 1, 2022
Who Deducts	Person responsible for paying consideration to resident
Exchange Responsibility	Exchange to deduct TDS for transactions facilitated on platform

Practical Calculation Example

2.4 RBI and Banking Relationship

Despite the Supreme Court verdict, the relationship between crypto businesses and banks remains challenging:

Current Status

• RBI has not issued fresh circulars post-IAMAI judgment
• Many banks remain reluctant to provide services citing "internal policies"
• Payment gateways face periodic disruptions
• UPI services are generally unavailable to crypto exchanges

RBI's Position (2024-25)

RBI has consistently maintained its cautionary stance on cryptocurrencies:

• Repeatedly highlighted risks of crypto assets in Financial Stability Reports
• Advocated for comprehensive legislation
• Distinguished between private cryptocurrencies and the proposed Digital Rupee (CBDC)
• Concerns about macroeconomic stability and capital flight

2.5 FIU-IND Compliance Requirements

In 2023, the Financial Intelligence Unit - India (FIU-IND) issued directives requiring Virtual Digital Asset Service Providers (VDA-SPs) to register as reporting entities under the Prevention of Money Laundering Act, 2002.

Key Compliance Obligations

1. Registration: All VDA-SPs must register with FIU-IND
2. KYC Requirements: Robust customer identification and verification
3. Transaction Monitoring: Systems to detect suspicious transactions
4. STR Filing: Suspicious Transaction Reports to be filed within specified timelines
5. Record Keeping: Maintain records for 5 years post-transaction
6. Principal Officer: Designated officer for PMLA compliance

2.6 GST Implications

The GST treatment of cryptocurrency transactions remains ambiguous:

Transaction Type	Possible GST Treatment	Uncertainty
Exchange Services	18% on service fees	Generally accepted
Crypto Trading	Supply of goods?	Classification unclear
Mining Rewards	Service supply?	No clarity
NFT Sales	Goods or services?	Case-by-case analysis

2.7 Pending Cryptocurrency Bill

The proposed Cryptocurrency and Regulation of Official Digital Currency Bill has been listed in Parliament's agenda multiple times but not yet introduced. Key expected provisions include:

• Definition and classification of various crypto assets
• Licensing framework for crypto businesses
• Consumer protection measures
• Framework for RBI's Digital Rupee
• Penalties for violations

2.8 Key Takeaways

• The IAMAI verdict established that crypto trading is not illegal, but RBI can regulate after following proper procedure
• VDA taxation at 30% with no loss set-off creates significant tax burden
• 1% TDS under Section 194S applies to all VDA transfers above threshold
• FIU-IND registration is mandatory for VDA service providers
• Comprehensive crypto legislation is still awaited
• Banking access remains challenging despite legal clarity