In some situations, dealing in them can be illegal, says law expert

With regulatory and enforcement agencies clamping down on Bitcoin operators in India, leading international legal and taxation expert Nishith Desai has given this cryptographic digital product a clean chit stating that Bitcoins per se are not illegal in India but how one deals with these may be matter of legality.

“Our Bitcoins Practice Group examined the issue from techno-legal perspective, and we have found that Bitcoins per se are not illegal in India. This is in consonance with international approach,” said Nishith Desai, Founder & Managing Partner of Nishith Desai Associates.

“Every new technology comes with new legal and tax problems and technology is a double-edged sword. It is very important that the new technology is understood in timely basis and appropriate regulatory regime is developed so that India does not miss out from a vast opportunity. We should not throttle this business,” Mr. Desai said.

He said ten years ago, lot of people lost lot of money in dotcoms and now only the e-commerce business has taken off. Similarly, Bitcoins, may be highly risky now but it can be an alternative to general currency and can be a major financial instrument in future.

Mr. Desai’s law firm has been hired by Bitcoins Alliance India (BAI), a community of Bitcoin entrepreneurs, to examine the legality of Bitcoins and come out with a white paper evaluating all aspects of this new concept.

“In some situations, dealing in Bitcoins can be illegal. You cannot export goods from India and receive payment in Bitcoins and park it outside. Proceeds of exports must be repatriated to India in terms of foreign exchange through normal banking channels. An intermediary needs to pay service tax. If Bitcoins are sold for a price in terms of ‘money’, then Sale of Goods Act would apply but accepting Bitcoins against goods should not attract the provisions of Sale of Goods Act.

Provisions of Foreign Exchange Management Act (FEMA) would not be triggered especially when the transactions are intra-India. “Importation of Bitcoins would be legitimate if transactions are carried out through proper banking channels,” Mr. Desai said.

“In any event, as a commercial transaction, the provisions of the Indian Contract Act would have to be complied with. Consequently, a transaction in relation to Bitcoins must be for lawful consideration and should not be opposed to public policy. Thus, Bitcoins per se are not regulated by any authority as it is an ‘internet product’ so to say,” he added.

According to Mr. Desai, if someone sells Bitcoins after keeping it for many years and gets profit, he/she must pay capital gains tax and if somebody accepts Bitcoins for service rendered, he/she should pay the applicable income tax after converting the Bitcoins into rupee.

“It is the job of the government to warn the public due to the high volatile and high risk proposition of Bitcoins. It should not create fear that Bitcoins are illegal. Bitcoins are for those who have high risk appetite and who have faith in this technology,” Mr. Desai said.

“BAI has welcomed the warning given by the Reserve Bank of India to the people at large about the risks surrounding the purchase, sale and use of Bitcoins. So people who don’t know about Bitcoins, those who have no faith on them or are ignorant about this technology should not have any exposure into this,” Mr. Desai said.

He said Bitcoin creation and transfer were based on open source cryptographic protocol managed by a decentralised manner, and, if harnessed properly, Bitcoins could deliver many benefits to India’s economy.

Bitcoins like any other cash can be used for illegal purposes. “But cash is not simply traceable except by catching someone with physical possession. Bitcoins are far more traceable than money especially when traded through Bitcoin traders. BAI already has stringent KYC process,s and is keen to collaborate with regulators to develop further standards,” Mr. Desai added.

So what are Bitcoins? They look like currency or money, but it is not. It sounds similar to security or shares, but it is not. It feels like derivative or negotiable instrument, but it is not. It is not pre-paid instrument either. While in the U.S., Bitcoins are regarded as a commodity, it is doubtful whether it could be considered so in India as it is an intangible property, feels BAI.