Digital assets await enabling legal framework

Cyber Law Expert

The Budget-2022-23 speech of Finance Minister Nirmala Sitharaman has explored a less-travelled path and opened up potential for numerous opportunities. One of its key features is the mention of digital currencies.

Till date, India has had fiat currency in the form of the Indian rupee. However, with the increased reliance on the digital format and with more and more Indians jumping on the digital bandwagon, the government has appreciated the need for having a digital currency. That is why the minister has talked about the introduction of the Central Bank Digital Currency (CBDC).

The CBDC concept is evolving. In the layman’s language, the coming of cryptocurrencies has propelled the central banks of various countries to think of providing alternatives to cryptocurrencies. The CBDC is often seen as a digital token which is issued by the central bank of a country.

Often, the central bank pegs the digital token to the fiat currency of the country concerned. As the Atlantic Council points out, the Central Bank Digital Currency is virtual money, backed and issued by the central bank of the country concerned. The advantage of the CBDC is that it is the responsibility and liability of the central bank of the particular country.

In this context, the Budget speech highlights the proposal for the issuance of the digital rupee using block chain and other technologies by the Reserve Bank of India (RBI) from 2022-23.

The Budget further highlights that there are tremendous advantages of the CBDC in the form of the digital rupee. It is expected that the Indian digital economy is likely to get a tremendous boost with the coming of the Indian digital rupee.

Further, it is also envisaged that the digital rupee and digital currency would lead to a more efficient and cheaper currency management system.

This represents the dawn of a new chapter as far as the evolution of the digital currency and digital payments in India is concerned.

The term ‘digital’ gets referred to at 35 different places in the Budget speech, relating to different aspects of activities in the digital ecosystem.

The Budget speech has broken new ground. It has provided for the first time a scheme of taxation of digital assets. India has been seeing a massive increase in cryptocurrencies and crypto-assets. However, it does not have any dedicated legal framework on cryptocurrencies and crypto-assets.

It is interesting to note that more and more Indians have been investing in virtual digital assets, thereby leading to an increase in the magnitude and frequency of transactions in virtual digital assets.

Further, the speech provides a distinctive scheme for the taxation of virtual digital assets. The salient elements of this scheme are diverse. It provides that any income from the transfer of such assets shall be taxed at the rate of 30 per cent.

Secondly, no deduction in respect of any expenditure or allowance is thereby allowed while computing such income from the transaction of virtual digital assets, except the cost of acquisition of these assets.

Thirdly, it has been provided that loss from transfer of virtual digital assets cannot be set off from other income.

Fourthly, the scheme provides for tax deducted at source (TDS) on payments made in relation to the transfer of virtual digital assets at the rate of one per cent of such considerations above a monetary threshold.

The net effect of these proposals is that the government is seeking to expand the ambit of taxation to virtual digital assets. It is here that the Budget speech walks on thin ice.

It needs to be noted that India does not have any legal framework on virtual digital assets. In its absence, the 30 per cent taxation slab proposed on the transfer of any virtual digital asset may be perceived by the common man as an acknowledgment of the legality of such an asset.

However, this is a grey zone. For the benefit of those dealing in virtual digital assets, it is essential that an enabling legal framework be appropriately framed so as to support the Budget proposal pertaining to the taxation of these assets.

Further, such an approach will bring more clarity and help consolidate the growth of the crypto ecosystem in India.

The Indian digital rupee would also require some minimal legal enablement. This is so because the digital rupee as a concept is not recognised in the Information Technology Act, 2000. Appropriate amendments would be required to be made under this Act and under the Reserve Bank of India Act, 1935, to provide a minimal legal framework for promoting the digital rupee.

The legalities of the digital rupee will also have to be appropriately worked out. There is a need for more clarification in this regard so that more people could be encouraged to use the digital rupee.

All said and done, the Budget speech has opened new vistas of opportunities for the digital rupee and virtual digital assets. However, the opportunities have to be supported with an enabling legal framework so as to ensure that India reaps the benefits of virtual digital assets and digital currency in the coming times.