INTRODUCTION
Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.
According to reports, the country currently has more than one crore crypto investors, and the number is significantly growing every day with several domestic crypto exchanges operating in the country.
The Reserve Bank of India vide Circular dated April 6, 2018 (‘RBI Circular’) had restricted all entities regulated by the RBI from dealing in or providing services for facilitating ‘any person or entity dealing with or settling’ virtual currencies. Despite the Reserve Bank of India (RBI) being wary of cryptocurrencies, Indians are making a beeline to invest in the digital coins, touted as the most important asset class of the 21st century.
The RBI had earlier cautioned users, holders and traders of virtual currencies, regarding various financial, operational, legal and security risks associated in dealing with such virtual currencies.
The Ministry of Corporate Affairs (MCA), Government of India, issued notifications dated 24th March, 2021 to amend Schedule III to the Companies Act, 2013 (hereinafter referred to as ‘the Act’); Companies (Accounts) Rules, 2014 and Companies (Audit and Auditors) Rule, 2014 to enhance the disclosures required to be made by the Company in its Financial Statements, Board Report and Audit Report. The aforementioned notifications shall come in effect from the 1st day of April, 2021.
EXORDIUM TO THE MCA NOTIFICATION:
On the basis of finding of the Report, a draft of the “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 2019” was placed in the public domain before issuing in the Official Gazette of India. The draft bill was proposed to prohibit person to mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency in the territory of India directly or indirectly in any manner including a medium of exchange and/or a store of value and/or a unit of account. Cryptocurrency shall not be used as legal tender or currency at any place in India.
During the recently held Budget Session of Parliament, the Central Government had proposed to introduce the ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’ Analysts have speculated that the new cryptocurrency bill might impact some existing investors who are already investing in private digital currencies like bitcoin in the country. This is because if the Centre goes by the recommendation of the Inter-Ministerial Committee (IMC) then private cryptocurrencies will be banned in the country which will understandably cause a loss to the existing crypto investors of the country. However, it is still not clear if the new legislation will include Bitcoin or Ethereum under the list of banned private cryptocurrencies.
However, for the reasons unclear, the Bill was not taken up for consideration during the last Parliamentary session.
ANALYSIS OF MCA NOTIFICATION:
The MCA Notification has amended Schedule III of the Act with effect from April 01, 2021. This includes an amendment to Paragraph 5 of Part II of Schedule III of the Act, which provides a list of additional items that a company, irrespective of being listed or unlisted, has to disclose by way of notes regarding aggregate expenditure and income in their statement of profit and loss.
The MCA Notification has inserted item (xi) in Paragraph 5 of Part II of Schedule III of the Act, to provide that companies shall disclose the details of cryptocurrency or virtual currency. Where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the company should disclose the following:
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profit or loss on transactions involving cryptocurrency or virtual currency;
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amount of currency held as at the reporting date; and
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deposits or advances from any person for the purpose of trading or investing in cryptocurrency or virtual currency.
The MCA Notification comes at a time, when on the one hand, the trading in cryptocurrency is multiplying at an exponential rate in India, and on the other hand, there is nervousness amongst the traders and investors with regard to potential banning of private cryptocurrencies/ virtual currencies.
TAXATION CONCERNS
In 2017, the MCA had instructed the Serious Fraud Investigation Office (‘SFIO’), established under Section 211 of the Act, and the Registrar of Companies, to gather details about companies that deal in cryptocurrencies.
INTERNATIONAL POSITION ON DISCLOSURES FOR CRYPTOCURRENCY
IRS Guidance for U.S. Taxpayers
In the U.S., the Internal Revenue Service (IRS) has taken an increasing interest in bitcoin and has issued guidelines. In 2014, the agency issued IRS Notice 2014-21 to provide information on the tax treatment of virtual currencies. For 2020, the IRS had asked to declare if they are engaged in any virtual currency transactions.
Switzerland Law
Switzerland has no laws or regulations that are tailor-made to the phenomenon of cryptocurrencies or mining of cryptocurrencies. Hence, mining of cryptocurrencies is permitted and the activity is not subject to particular laws and regulations. It requires disclosure of digital currencies, including cryptocurrencies, as assets in the annual returns of companies dealing in such transactions.
Singapore Law
In Singapore, cryptocurrency exchanges and trading are legal and the city-state has taken a friendlier position on the issue than some of its regional neighbours. Although cryptocurrencies are not considered legal tender, Singapore’s tax authority treats Bitcoins as “goods” and so applies Goods and Services Tax (Singapore’s version of Value Added Tax). The Monetary Authority of Singapore (MAS) has adopted a neutral position on the growth of cryptocurrencies: in 2017 it clarified that, while it would not seek to regulate virtual currencies, it would regulate digital payments tokens (DPT) if those tokens were classified as “securities”.
CONCLUDING ANALYSIS:
Industry experts believe that disclosing crypto holdings and transactions will create an inclusive financial ecosystem and boost investor confidence. The Government seems to be taking a more calibrated approach along with the disclosure requirements under the MCA Notification to reduce the nervousness of investors. It is a welcome move as the amendment is a great stride towards a regulated environment which is what the industry has been eagerly anticipating.
CS Kamakshee Kothari