India’s approach to virtual digital assets (VDAs) continues to navigate a complex legal landscape, marked by a reliance on existing statutes rather than dedicated legislation. While Parliament has established a detailed tax regime requiring a flat 30 per cent tax on gains under section 115BBH of the Income-tax Act, 1961, and a 1 per cent TDS under section 194S, the country still lacks a comprehensive statute defining the overarching legal status of crypto-assets.
This framework creates a unique dichotomy where the state taxes an activity without clearly defining its legality. Under the precedent of CIT v. Piara Singh (1980), the Income-tax Act concerns itself with the existence of income rather than the source's legality, ensuring profits from various activities remain taxable. However, legal experts note that this doctrine does not replace the need for clear legislative definitions.
The tension within the current regulatory architecture is increasingly visible through enforcement actions. A recent investigation by the Enforcement Directorate (ED) into Bengaluru-based cryptocurrency payment companies involves allegations of facilitating cross-border settlements worth over ₹2,500 crore through stablecoins. These transactions allegedly occurred outside channels recognized under the Foreign Exchange Management Act, 1999 (FEMA), resulting in the freezing of bank accounts containing approximately ₹6 crore.
This situation illustrates the overlap of multiple statutes designed for entirely distinct legislative purposes. The Income-tax Act raises revenue, FEMA regulates foreign exchange and safeguards monetary stability, and the Prevention of Money Laundering Act (PMLA) targets proceeds of crime. None of these laws were originally enacted to determine the legal character of blockchain-based assets or decentralized digital payments.
Legal observers point out that businesses can navigate strict taxes or licensing conditions, but fragmented legislation and legal ambiguity introduce high commercial risks. When one statute taxes an activity while another investigates it under older frameworks, market participants face compliance uncertainties that can drive capital toward jurisdictions with more coherent legal structures.
The debate emphasizes that regulating emerging technologies requires a dedicated statutory framework enacted by Parliament. Such a framework would need to distinguish speculative assets from payment instruments, reconcile taxation with foreign exchange regulations, and clearly outline the rights and obligations of market participants, rather than relying on courts, tax authorities, and enforcement agencies to interpret older laws.
"The current friction between digital asset innovations and traditional regulatory frameworks highlights an urgent need for legislative clarity in India. When businesses face overlapping mandates from tax authorities, enforcement agencies, and foreign exchange laws without a unified digital asset statute, compliance becomes a major operational risk. For the ecosystem to mature sustainably, Parliament must establish clear, dedicated guidelines that separate taxation from legality and provide predictable rules for market participants." — Dr. Shishir Gupta, Founder & CEO, StartupLanes
