Why In the News?
- Recently, the Financial Intelligence Unit (FIU-India) under the Ministry of Finance introduced stricter Know Your Customer (KYC) and Anti-Money Laundering (AML) norms for cryptocurrency users.
- These new guidelines mandate “live selfie” verification with liveness detection, geo-tagging, and bank account validation to curb deepfakes and money laundering.
I. Current Regulatory Framework in India
India currently follows a policy of “Taxation without Recognition”. While cryptocurrencies are not “legal tender” (like the Rupee), they are not banned.
1. Legal Status
- Supreme Court Ruling (2020): In the IAMAI vs. RBI case, the Supreme Court struck down the RBI’s 2018 circular that banned banks from facilitating crypto transactions, citing “proportionality.”
- Virtual Digital Assets (VDA): Under Section 2(47A) of the Income Tax Act, crypto-assets are defined as Virtual Digital Assets. This includes cryptocurrencies, NFTs, and any other notified digital token.
- Not Legal Tender: They cannot be used as a medium of exchange for government payments or as a legal substitute for the Rupee.
2. Taxation Regime (Budget 2022 onwards)
| Provision | Detail |
| Flat Tax Rate | 30% tax on income from the transfer of any VDA (Section 115BBH). |
| TDS (Tax Deducted at Source) | 1% TDS on the transfer of VDAs above a threshold (₹10,000 or ₹50,000) under Section 194S. |
| Loss Treatment | Losses from crypto cannot be set off against any other income, nor can they be carried forward to future years. |
| Deductions | No deductions are allowed except for the cost of acquisition. |
3. PMLA Compliance
In March 2023, the Ministry of Finance brought VDA transactions under the Prevention of Money Laundering Act (PMLA), 2002.
- Reporting Entities: Crypto exchanges and service providers are now “Reporting Entities.”
- Mandatory Registration: They must register with the FIU-IND.
- Reporting: They are legally bound to report “Suspicious Transaction Reports” (STRs) and maintain KYC records of all users.
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4. Central Bank Digital Currency (CBDC) – The e-Rupee
- Nature: CBDC is the digital form of fiat currency (INR) issued by the RBI. It is legal tender.
- Types:
- a) Retail (e₹-R): For use by the general public and businesses.
- b) Wholesale (e₹-W): For interbank settlements and financial institutions.
- Difference: Unlike Bitcoin, the e-Rupee is centralized, sovereign-backed, and has zero price volatility against the fiat Rupee.
II. Important Terminology for Prelims
- Stablecoins: Private cryptocurrencies pegged to a stable asset (like the US Dollar) to reduce volatility (e.g., USDT, USDC). The RBI remains highly critical of stablecoins due to risks of “dollarization” of the economy.
- Un-hosted Wallets: Private wallets (like hardware or software wallets) not managed by a third-party exchange. These are a major concern for regulators due to anonymity.
- Proof of Reserves: A method used by exchanges to prove they hold enough assets to cover all user balances.
Q. With reference to the 'Virtual Digital Assets (VDA)' in India, consider the following statements:
1. The income from the transfer of VDAs is taxed at a flat rate of 30%, but losses can be carried forward for up to three financial years.
2. Under the current PMLA norms, all cryptocurrency exchanges operating in India must register with the Financial Intelligence Unit (FIU-IND).
3. Central Bank Digital Currency (CBDC) is a form of private cryptocurrency that is granted 'legal tender' status by the Reserve Bank of India.
Which of the statements given above is/are correct?
A) 1 and 2 only
B) 2 only
C) 2 and 3 only
D) 1, 2 and 3
Correct Answer: (B)
Solution
STATEMENT 1 INCORRECT: While the tax rate is 30%, losses from VDAs cannot be set off against any other income and cannot be carried forward to succeeding assessment years.
STATEMENT 2 CORRECT: In 2023, the government brought VDA service providers under the PMLA, making it mandatory for them to register with the FIU-IND as reporting entities.
STATEMENT 3 INCORRECT: CBDC is not a private cryptocurrency; it is a sovereign currency issued by the RBI. Private cryptocurrencies like Bitcoin are decentralized and not issued by any state authority.
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