Authored By: Giridhar Panuganti
GSKM Law College, Rajamahendravaram
Abstract
This article explores the paradoxical stance of the Indian legal system regarding cryptocurrencies: the government taxes digital assets under a well-defined fiscal regime, yet provides no corresponding regulatory framework for their legal status, governance, or protection. Through a constitutional and statutory lens, the piece dissects how India’s crypto policy imposes fiscal obligations without granting legal recognition — a scenario that raises concerns about legality, fairness, and fundamental rights.
Introduction
Cryptocurrencies, once dismissed as fringe instruments, have now entered the Indian financial mainstream — not through regulation, but through taxation. While major economies either regulate or ban digital assets, India has adopted a contradictory stance: impose taxes without legalizing or regulating the underlying assets.
This paradox places India at a critical juncture. The Finance Act, 2022 introduced a 30% flat tax on gains from Virtual Digital Assets (VDAs), and a 1% Tax Deducted at Source (TDS) on all crypto transfers. However, there exists no law recognizing crypto as legal tender, commodity, security, or property. This raises the core question: Can the State impose taxes on assets it refuses to legally recognize?
Taxation Without Recognition: The Structure of the Paradox
What the Finance Act, 2022 Says
- Introduced Section 115BBH: Gains from VDAs taxed at 30%.
- Introduced Section 194S: 1% TDS on transfer of VDAs.
- VDAs defined broadly to include cryptocurrencies and NFTs.
Despite this fiscal recognition, the Income Tax Act, Companies Act, and RBI Act remain silent on the legal nature of crypto.
No Regulation from RBI or SEBI
- RBI’s 2018 crypto banking ban was struck down by the Supreme Court in Internet and Mobile Association of India v. RBI (2020), but no framework replaced it.
- SEBI has neither recognized crypto as a security nor issued licensing norms. • No statutory protection exists for crypto fraud, insolvency, or exchange failures.
Constitutional and Legal Implications
Violation of Article 14 (Equality Before Law)
- Taxing crypto while denying it legal status creates class inequality.
- Other financial instruments (stocks, mutual funds) are taxed and regulated; crypto investors face obligations without protections.
Violation of Article 19(1)(g) (Right to Trade)
- Citizens have the right to carry on trade or business.
- In absence of regulation, exchanges and investors face arbitrary banking restrictions, violating freedom to trade.
Principle of Legality in Taxation
- Under Indian constitutional jurisprudence, no tax can be levied without the authority of law.
- While the Finance Act authorizes tax, the absence of a corresponding legal structure creates a form of fiscal overreach.
- Courts may soon need to determine whether taxation implies de facto legalization, and whether legal vacuum violates natural justice.
Judicial Response So Far
Internet and Mobile Association of India v. RBI (2020)
- Supreme Court quashed the RBI ban, citing disproportionality.
- Affirmed the right of crypto exchanges to operate.
- However, did not rule on crypto’s legal status.
Pending PILs in Delhi and Gujarat High Courts
- PILs seek clarity on regulation, tax treatment, and investor protections.
- Courts have not yet delivered binding judgments, but have directed the Union government to clarify its policy.
International Comparisons
Country Legal Status Taxation
United States Treated as property by IRS Capital gains tax UK Treated as property Income & CGT Singapore Recognized, regulated 0% tax on long-term China Banned No taxation India Undefined (neither legal nor illegal) 30% tax, 1% TDS India stands nearly alone in taxing crypto without regulating or legalizing it — a model that’s internally inconsistent and vulnerable to challenge.
Policy and Legal Consequences
- Investor Confusion: People pay tax on gains but have no legal standing in disputes. • Exchange Instability: No licensing means no oversight, no compliance standards.
- Capital Flight: Web3 and crypto startups continue to relocate to UAE, Singapore, and Switzerland.
- Enforcement Arbitrage: Agencies like ED and IT Dept. operate in grey zones, creating scope for selective targeting.
The Way Forward
Enact Comprehensive Crypto Legislation
- Define VDAs under a single legal framework.
- Assign regulatory roles (RBI for currency-like tokens, SEBI for security-like tokens). • Introduce KYC, AML, investor protection, and audit norms.
Constitutional Clarity
- Parliament must align taxation with legal recognition.
- Citizens should not bear fiscal burdens without legal identity or protections. C. Judicial Intervention
- Courts may soon be compelled to rule whether taxing unrecognized assets violates basic structure doctrine, particularly principles of legality, equality, and trade freedom.
Conclusion
India’s current crypto framework is a textbook case of “fiscal legitimacy without legal legitimacy.” By taxing an unregulated space, the State generates revenue without assuming legal responsibility or providing safeguards. This creates not only a policy contradiction, but also a constitutional tension that the judiciary will inevitably be called upon to resolve.
