India: Despite tax ‘legitimacy’, here’s why a ‘crypto ban’ is still not off the table

Soon after the Indian government’s announcement to bring the transfer of digital assets into the 30% tax bracket, Economic affairs secretary Ajay Seth has said that even a ban is still not off the table. Cautioning about risks of virtual assets, he stated in an interview,

“The Finance Bill has sought to provide clarity on taxation but that does not mean that all policy options are off the table. Everything is on the table – whether ban, regulation, etc, but that’s a separate aspect, which is taking time because of the complexity and the nature of the asset.”

Meanwhile, CBDT Chairman JB Mohapatra has also agreed that taxation alone does not lend any “credence or legitimacy” to the legality of such transactions. He noted in another interview that,

“We are not the right authority to be questioning the legality of any activity. Income Tax kicks in when there is an incident for taxing a surplus or recognizing a deficit.”

Therefore, that being said, even when the new legislation is applicable for 2022-23, crypto-related transactions before April 2022 will not be tax-free as per the CBDT Chairman.

“Grey Area” of crypto

Before the national regulation on crypto is put in place, FM had stated that taxing income couldn’t wait. Therefore, a bill that is still in the works, can further clarify the position concerning the legality of “virtual assets.” Until then, crypto is also not illegal. Finance secretary T V Somanathan said soon after,

“They are in a grey area. It’s not illegal to buy and sell crypto.”

However, most industry players, have given a positive reaction to the above announcements as it also means the government’s stamp of approval for the asset class, for the time being. Having said that, it is worth noting that the word “crypto” is missing from the legislation. The legislation has stuck to the words “virtual assets” while providing guidance.

The Finance Minister had stated in this regard that “Cryptocurrencies are not currencies”. This essentially means that only RBI is going to issue a digital currency, the rest of the ecosystem will come under “assets created by individuals.”

With that, revenue secretary Tarun Bajaj has told the media that as per the current guidance, Income tax return (ITR) forms from FY23 will have a separate column for disclosing crypto surplus.

This can be compared to what the U.S. revenue department is doing. The 1040 U.S. Individual Income Tax Return form for U.S. citizens asks,

“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”