INDIA Law and Practice Contributed by: Vijayendra Pratap Singh, Asif Ahmed, Tanmay Sharma and Bhanu Jindal, AZB & Partners
involving such “virtual digital assets” at 1% tax deducted at source. Notably, the Finance Act introduced a new clause (47A) in Section 2 of the Income Tax Act defining a virtual digital asset as “any informa- tion, code, number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital rep - resentation of value which is exchanged with or without consideration, with the promise or rep- resentation of having inherent value, or [which] functions as a store of value or a unit of account and [this] includes its use in any financial transac - tion or investment but [is] not limited to invest- ment schemes, and [which] can be transferred, stored or traded electronically” . Non-fungible tokens and any other token of a similar nature are included in this definition. The Finance Act recognised that the introduc - tion of any cryptocurrency can only happen as a result of the Central Bank, namely the RBI, which alone has the power to issue a Central Bank digi - tal currency as defined under the Finance Act. In light of this, cryptocurrencies are not recognised as legal tender under Indian law, and the Finance Act clearly identifies that the power to issue cur - rency coins and notes rests only with the RBI. The RBI has repeatedly cautioned parties from dealing with cryptocurrencies, and has through a circular dated 6 April 2018 (the “April 6 Cir- cular” ) asked banks and entities regulated by the RBI to not allow use of the banking system for trade in crypto-assets. However, in Inter -
net and Mobile Association of India v RBI, the Supreme Court of India struck down the April 6 Circular. Therefore, banks are presently deal - ing with accounts that relate to entities/persons dealing in crypto-assets. Nevertheless, through its circular dated 31 May 2021, the RBI has also advised its regulated entities to continue to carry out customer due-diligence processes for transactions in “virtual digital assets” , in line with regulations governing standards for know- your-customer, anti-money laundering, and the combating of financing of terrorism obligations under the PMLA. Nonetheless, in March 2023 the government of India formally brought “cryptocurrency” and “vir- tual digital assets” under the regulatory ambit of the PMLA. It is now mandatory for any person dealing with cryptocurrencies and/or virtual digi - tal assets to comply with reporting requirements. There are increasing incidents of law enforce - ment authorities freezing crypto-assets where they are suspected of being involved in the com - mission of crime. This nuanced area is becoming a topic of debate, as by their very nature “asset tracing” of crypto- assets presents a challenge. “Blockchain” tech - nology does not allow complete asset-tracing and, as recognised by the Supreme Court of India, every crypto-asset differs in nature, wheth - er it is anonymous or pseudo-anonymous, and in light of the potential impact of attachment or confiscation of such property (given that a public ledger does not allow change of ownership in a traditional way).
222 CHAMBERS.COM
Powered by FlippingBook