Preface
Mains
Crypto-currency, especially, Bitcoin has become controversial. A few countries, like US and Japan have allowed crypto exchanges, whereas China and South Korea have banned dealing in Bitcoin. India is in a fix- neither giving it a legal status nor declaring it illegal. Ministry of Finance formed a committee in April 2017 to submit its report within three months whether to allow crypto-currencies to be traded in India. If yes, how to deal with it- as a legal tender or as an asset; who would be the regulator; and the safe guards to be adopted to protect interest of the nation.
Finance
Minister Arun Jaitley says government do not recognize
crypto-currency as legal tender, but he has not categorically
declared crypto as illegal. However, there are many laws and
regulations in India which may make life miserable of the persons
dealing in Bitcoin. This article is an attempt to explain these
laws which the persons dealing in crypto-currency must be aware of.
Crypto-currency, especially, Bitcoin has become controversial. A few countries, like US and Japan have allowed crypto exchanges, whereas China and South Korea have banned dealing in Bitcoin. India is in a fix- neither giving it a legal status nor declaring it illegal. Ministry of Finance formed a committee in April 2017 to submit its report within three months whether to allow crypto-currencies to be traded in India. If yes, how to deal with it- as a legal tender or as an asset; who would be the regulator; and the safe guards to be adopted to protect interest of the nation.
Union finance
minister Arun Jaitley, in his Budget 2018 speech said that government does not recognize crypto-currencies such as Bitcoin, Ripple and
Etherium as "legal tender" and as such will discourage their
use. Mr Jaitley further said that
his government "will take all measures to eliminate the use of crypto in
financing illegitimate operations".
The statement of
Finance Minister has further confused the nation. Of course, no government will
recognize crypto-currency as legal tender. FM has kept mum as to (a) whether he
will treat crypto as an asset or an investment opportunity (b) whether unregulated crypto exchanges will be allowed to operate in India, and (c) what is
the stand of the government if legitimate operations are conducted through the
medium of crypto-currencies.
Due to this
confused state investors are put to high
risk area- if they don’t invest, they may lose a golden opportunity to earn
handsome profit (people have become multi-millionaire over a short span by investing in Bitcoin) – and
if they invest and lose their money, there is no authority to help them.
Government has spared itself from
responsibility by a simple statement that it considers Bitcoin
equivalent to Ponzi Scheme. Similarly, Reserve Bank also keeps on issuing
advisories periodically to desist investors dealing in crypto. Billion of
rupees in the shape of Bitcoin are being traded through unregulated
exchanges; government and the RBI are
simply issuing advisories without taking any concrete steps to safe guard the
innocent investors.
Let’s first analyze
why the governments of nations are confused about the Bitcoin. After the US sub prime crises in
2008 and the fall of Lehman Bros; the trust on banking industry was shaken.
Satoshi Nakamoto, an unknown entity, published a paper on peer to peer money
transfer through the medium of Bitcoin,
a virtual currency, using block-chain technology wherein the control of a
single agency or the government or the nation
was wished out. Under the new scheme, the transaction control was
diversified in the hands of numerous participants spread over different corners of the world. Blockchain technology augmented peer-to-peer transactions eliminating the
role of intermediate banking industry.
The concept of
virtual currency was welcomed on many counts:-
One: The fiat currencies
of nations are of national character whereas its citizens are becoming global
in stature. Instead of exchanging currencies every now and then while
travelling to different countries; these global characters were long wishing a
global currency. Bitcoin fulfilled their wish being global in nature.
Two: In a family
of four persons, if all are staying in different countries and one member wants to send some money to the
other, one has to go through the banking channel paying their hefty charges. In
international transactions, banks conduit a trust between two unknown entities
and charge for this trust. But what trust banks give in a transaction between
father and his son living in different countries. Why do they require a bank in
between. Bitcoin facilitates
peer-to-peer transaction.
Three: The circulation of Bitcoin are fixed in
numbers, ie, maximum 21 million will come into circulation. It cannot be
misused by the governments for meeting their deficit financing or populist
election expenditure as is done in fiat currencies wherein governments print
‘n’ number of currency notes thus devaluing their own currency. Whereas the
value of Bitcoin will always be increasing since its supply is fixed and demand
will keep on increasing. Thus investing in Bitcoin is beneficial in the long
run than investing in fiat currency.
In spite of so
many benefits, no government would like to declare it a legal tender, because
then it will lose its status of monetary authority. Bitcoin is posing a big
threat to the monetary system of the nations. A day may come when all the
governments the world over may join
hands to combat this big demon but may not succeed.
Recently, Income
Tax Department raided crypto-currency
exchanges in India with the sole objective to know whether investors have paid
taxes on profits out of sale of Bitcoin. Income Tax Department is not concerned
about the legality of the transaction. As per income tax rules, “Income is
income, though tainted. For purpose of Income-tax, there is no difference
between legal and tainted income. Even illegal income is taxed just like any
legal income. By taxing such income, the state is not taking part in the crime
or condoning it, nor would become a principal or a sharer in the illegality.
The revenue merely looks at an accomplished fact, viz, on profits having earned
and assess the same”.
Hence by paying
tax over the profit earned on a transaction
will not make it legal if otherwise it is not- the same is the case with
crypto-currencies.
Naïve investors
are attracted towards the price difference of Bitcoin in US and Indian
exchanges; and resort to Arbitrage of
crypto-currency. Let’s illustrate with
example:-
A Non-Resident
Indian staying in US comes across an arbitrage opportunity (on 02nd February, 2018) wherein he can buy a
Bitcoin in US exchange Coinbase for USD 10085 and to sell in Indian exchange
Koinex for INR 725000 (which is equivalent to USD 11382). He has two options available to
complete this arbitrage:-
1.
Buy in US
exchange for USD 10085; transfer to Indian exchange in his own account; sells it
for INR 725000; transfer rupee funds to
his NRO account; finally remit these funds (USD 11382) to US from his NRO account. If he has to pay USD 500
for exchanges/banks’ charges and currency conversion cost etc, still he can
pocket USD 797 as arbitrage profit. As a
law-abiding citizen, he also pays income-tax on this profit, still a handsome
gain.
Looks lucrative. But FEMA comes into picture. As per FEMA, permissible credits in NRO account
are:-
a.
Proceeds of
remittances received in any permitted currency from outside India through
normal banking channels.
b.
Legitimate dues
in India of the account holder like
rent, dividend, interest, pension etc.
Now question arises whether (a) sale proceeds
of Bitcoin in India is considered as remittance from outside India or (b) is it a
legitimate dues in India. No bank will allow to
deposit such funds in NRO
accounts without clarification from RBI; and RBI will never permit. Hence this rout of
arbitrage is partially blocked.
Even if RBI permits to deposit the sale
proceeds in NRO account; whether the account holder can repatriate the funds
abroad. As per FEMA, permissible debits
in NRO accounts are:-
a.
All local
payments in rupee.
b.
Remittance
outside India of current income in India of the account holder like rent,
dividend, pension, interest etc.
c.
Remittance up to
USD one million per financial year, for all bona fide purposes, to the
satisfaction of Authorized Dealer Bank.
Again a question; whether AD Bank will
consider this as remittance for bona fide purpose in the light of fact that
government of India and RBI are against the crypto-currency.
2.
The second option
to complete this arbitrage is : NRI purchases Bitcoin from US exchange; gifts this to his blood relation in India; the
relative sells Bitcoin in India; pays short term capital gain tax on the profits
earned. As per US laws, gift tax is
levied on the donor. A US resident is exempt from gift tax if he gifts maximum
of USD 14000 to one recipient in a year. As per Indian laws, gift tax is
applicable in the hands of recipient and any gift from blood relation is totally exempt. However, on
the sale of gifted assets, while calculating
capital gain, cost of the asset is taken as was incurred by the previous
owner.
Here Foreign Contribution (Regulation) Act,
2011 poses hurdles. As per website of Ministry of Home Affairs , purpose of
FCRA is to facilitate receipt of foreign contribution for genuine purposes,
without compromising national security. Though foreign contribution received from a
relative is exempt, intimation is required to be submitted to the Ministry of
Home Affairs in form FC-1 if foreign contribution received in a financial year
exceeds rupee one lakh.
In the light of aversion towards
crypto-currency by the government, how many question will be asked to recipient
of Bitcoin. Since Bitcoin was purchased in dollar from US exchange and sold in
India, government may consider it foreign remittance in India.
Recently, Bank of International Settlement has
exhorted the member Central Banks to deal strictly with crypto-currencies as
these pose danger to the basic foundation of monetary system of the world.
Bitcoin will stay or not, only time will tell.
For the time being, governments are confused how to regulate it.
Epilogue
I put this article for general debate seeking suggestions – for and against crypto-currencies; and possible safeguards to be taken – which can be escalated at the appropriate forum making it easy for the government to enact regulations.
Epilogue
I put this article for general debate seeking suggestions – for and against crypto-currencies; and possible safeguards to be taken – which can be escalated at the appropriate forum making it easy for the government to enact regulations.
Tilak
Gulati,
Executive Trainer & Blogger.
Principal (Retd), Staff Training College, UCO Bank
Executive Trainer & Blogger.
Principal (Retd), Staff Training College, UCO Bank
Author: www.itstrgulati.blogspot.in
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