The Central Board of Direct Taxes (CBDT) is actively considering the necessity of a new legal framework for virtual digital assets (VDAs), including cryptocurrencies, and has engaged with cryptocurrency industry players to gather insights. This move comes amid growing concerns about tax evasion, money laundering, and the complexities of regulating a rapidly evolving digital asset landscape.

Currently, India does not have a specific law dedicated to regulating VDAs. Instead, the existing regulatory approach involves a combination of tax measures and oversight by various authorities, including the Reserve Bank of India (RBI), the Ministry of Finance, and the Securities and Exchange Board of India (SEBI). In 2022, the government implemented a 30% tax on income from VDA transfers and a 1% tax deducted at source (TDS) on transactions exceeding ₹10,000. While these measures acknowledge the VDA sector, they have also raised concerns about their impact on liquidity, investor sentiment, and compliance burdens for exchanges.

The RBI has consistently expressed reservations about cryptocurrencies, citing potential risks to financial stability, fraud, and money laundering. In 2018, the RBI attempted to restrict banks from providing services to VDA-related entities, but this was later overturned by the Supreme Court in 2020. Despite the lack of a comprehensive legal framework, the Ministry of Finance issued a notification in March 2023 under the Prevention of Money Laundering Act (PMLA), bringing VDA service providers under the ambit of anti-money laundering and counter-financing of terrorism regulations.

The rapid growth of the VDA market in India, coupled with the absence of clear regulations, has created challenges for investors, businesses, and regulators. The Supreme Court has also questioned the lack of comprehensive crypto regulation in India. The undefined regulatory status of VDAs makes it difficult for financial authorities to determine whether they should be classified as commodities or currencies.

A new legal framework for VDAs could provide greater clarity and address some of the existing challenges. It could help to define the legal status of VDAs, establish regulatory standards for VDA service providers, and clarify the tax treatment of VDA transactions. A well-designed regulatory framework could also help to mitigate the risks associated with VDAs, such as money laundering and terrorist financing, while promoting innovation and economic growth.

However, creating an effective regulatory framework for VDAs is a complex task. It requires balancing the need for regulation with the desire to foster innovation and avoid stifling the growth of the VDA market. Policymakers must also consider the global nature of the VDA market and the need for international cooperation.

The CBDT's engagement with cryptocurrency players suggests a willingness to consider different perspectives and develop a balanced regulatory approach. As India navigates the challenges and opportunities presented by VDAs, the development of a clear and comprehensive legal framework will be crucial for fostering a sustainable and responsible digital asset ecosystem.