By Dr. Anup P. Shah
Chartered Accountant
In the last issue,
BCAJ, July, 2021, we looked at the legal background of cryptocurrencies and various issues relating to them. We continue examining the legal problems associated with Virtual Currencies (VCs) in India.
This month, we take up the FEMA provisions in relation to VCs
RBI PUTS TO REST 2018 CIRCULAR
In May, 2021, the RBI issued a Circular to all banks asking them not to refer to its own Circular of April, 2018 cautioning customers against VCs. This was in light of the fact that the Supreme Court in
Internet and Mobile Association of India vs. Reserve Bank of India, WP(C) No. 528/2018, order dated 4th March, 2020 (SC) had held that the RBI Circular of April, 2018 was liable to be set aside on the ground of being ultra vires the Constitution (explained in detail in last month’s feature). Therefore, the RBI directed banks that in view of the order of the Supreme Court, the April, 2018 Circular was no longer valid and hence could not be cited or quoted from. It, however, added that banks may continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act (PMLA), 2002, in addition to ensuring compliance with relevant provisions under the Foreign Exchange Management Act.
CAN LRS BE USED FOR INVESTING IN CRYPTOCURRENCIES?
The Liberalised Remittance Scheme or LRS is a Scheme of the RBI under which any individual resident in India can remit abroad up to US $250,000 per financial year for permissible capital and current account transactions.
The million-dollar question is can the LRS be used for buying foreign crypto assets such as Bitcoins, Dogecoins? Alternatively, can a resident carry out a crypto arbitrage, i.e., buy cryptocurrencies from abroad and sell them in India? This is an issue on which there is no express prohibition under the LRS and there is more confusion than clarity.
When the LRS was introduced in February, 2004, the RBI stated that it could be used for any current or capital account transactions, or a combination of both. In May, 2007, the RBI clarified that remittances under the LRS were allowed only in respect of permissible current or capital account transactions. However, in June, 2015 the RBI introduced a novel concept of defining the permissible capital account transactions for an individual under the LRS. It defined them as follows:
(i) Opening of foreign currency account abroad with a bank;
(ii) Purchase of property abroad;
(iii) Making investments abroad;
(iv) Setting up wholly-owned subsidiaries and joint ventures abroad;
(v) Extending loans, including loans in Indian Rupees, to Non-Resident Indians (NRIs) who are relatives as defined in the Companies Act, 2013.
The decision of the Supreme Court in the case of Internet and Mobile Association of India (Supra) examined various facets of cryptocurrencies. The ratio of this decision is relevant even for determining the issue under LRS. Various important issues were examined in this case and one of the most important of these was ‘Are Virtual Currencies (VCs) “currency” under Indian laws?’ After examining various provisions of law, the Apex Court concluded that it was not possible to accept the contention that VCs were just goods / commodities and could never be regarded as real money! This decision has been analysed in great detail in last month’s feature.
One may consider whether VCs can be considered to be securities and, hence, permissible under the LRS as an investment in securities. FEMA defines a security to mean shares, stocks, bonds and debentures, Government securities as defined in the Public Debt Act, 1944, savings certificates to which the Government Savings Certificates Act, 1959 applies, deposit receipts in respect of deposits of securities and units of the Unit Trust of India established under sub-section (1) of section 3 of the Unit Trust of India Act, 1963 or of any mutual fund, and includes certificates of title to securities, but does not include bills of exchange or promissory notes other than Government promissory notes or any other instruments which may be notified by the Reserve Bank as security for the purposes of this Act. VCs are not shares, stocks, bonds, debentures, Government securities, savings certificates, deposit receipts in respect of deposits of securities or units of any mutual fund. Hence, it is not possible to contend that purchase of VCs from abroad tantamounts to an investment in securities.
The truth of the matter is that the RBI is not comfortable with the LRS being used to buy VCs. RBI’s view is that VCs are not currencies. Hence, bankers are shy to allow the LRS to buy VCs. However, what would be the position if a resident were to use the balance standing in his foreign bank account to buy VCs? How would the bankers then restrict the usage? The moot point is can the RBI have jurisdiction in such a case? Can one use credit cards and buy VCs on the ground that they are goods / intangibles and hence the transaction is a current account transaction and credit cards can be used on the internet for any permissible current account transaction? Some Indian banks have started asking their customers remitting money abroad for investment purposes to provide a declaration that such funds will not be used for buying cryptocurrencies such as Bitcoins.
In fact, some private banks have gone a step forward and added a clause in the LRS declaration which doesn’t stop at cryptocurrencies but also wants customers to declare that funds would not be used to buy units of mutual funds or any other capital instrument of a company dealing in Bitcoins / cryptocurrencies / virtual currencies. Further, the LRS declaration even stipulates that the source of funds for LRS remittances should not come from investments in Bitcoins or cryptocurrencies. Clearly, a case of throwing the baby out with the bathwater!
One point to be considered when dealing with this issue is that under FEMA one cannot do indirectly what one cannot do directly. Thus, if the RBI considers that VCs cannot be bought under the LRS, then one cannot buy them indirectly.
Another issue to be considered is that when remitting money under the LRS one needs to file Form A2 and fill in the Purpose Code. What Purpose Code would the bank show for cryptocurrencies – would it be Capital Account / Foreign Portfolio Investment? Without this clarity, a bank would not allow remittance for buying VCs.
ARE VCs GOODS?
In the aforesaid case of
Internet and Mobile Association of India (Supra), the RBI contended that Virtual Currencies are not legal tender but tradable commodities / digital goods. If this proposition is upheld then the question which arises is whether the buying and selling of VCs would attract the provisions under FEMA relating to export and import of goods?
The Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 defines ‘software’ to mean any computer programme, database, drawing, design, audio / video signals, any information by whatever name called in or on any medium other than in or on any physical medium. VCs are also computer programmes stored in a virtual medium and, hence, the question arises whether they can be considered goods.
If a resident buys VCs from abroad would it be treated as import of goods? In this case, the provisions of the Master Direction on Import of Goods and Services amended up to 1st April, 2019 would be applicable.
Similarly, if a resident pays for foreign services / goods availed of by him by way of VCs, then would the payment by VCs be treated as an export of goods and the receipt of the foreign services / goods as an import? In this case, the provisions of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 read with the Master Direction on Export of Goods and Services amended up to 12th January, 2018 would be applicable. If one considers the payment by VCs to be an export and the receipt of goods from abroad to be an import, then this would constitute a set-off of export receivables against import payables. The FEMA Regulations permit a set-off of exports against imports only if it is in accordance with the procedure laid down therein. A payment by VCs is not prescribed under the FEMA Regulations, and hence it is a moot point whether the same would be permissible.
(To be
concluded)
