INDIA LAWS on Accepting Payments in Bitcoin and Other Altcoins
Can an Indian merchant legally start accepting bitcoins in India?
Indian laws do not define digital currency or virtual currency, so we will have to look at the traditional definition of currency to see if Bitcoin falls in that definition. The term currency is defined in section 2(h) of the Foreign Exchange Management Act, 1999 (“FEMA”) in the following words:
“currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;
It is notable here that this is an inclusive definition which means that it has a large scope for expansion. The legislature has consciously made the definition capable of further expansion by making it inclusive and also by giving the Reserve Bank of India (“RBI”) the authority to notify other similar instruments. This means that if any instrument which is being used as a currency is not covered by the definition as it stands, then the RBI is free to notify it and include it in the definition of currency. All “currency” other than Indian currency is considered by the FEMA as “foreign currency” which would have to then comply with various rules and regulations under FEMA. This means that if Bitcoin is classified as a “currency”, it would have to come under the definition of “foreign currency” and Bitcoin transactions would therefore have to comply with the entire foreign exchange regime under FEMA.
It is clear that Bitcoin is not really similar to any of the instruments mentioned in the definition, not least because none of them are digital or virtual in nature. On May 3, 2000 the RBI notified “debit cards, ATM cards or any other instrument that can be used to create a financial liability” as “currency” under the FEMA (by Notification No. FEMA 15/2000/RB dated May 3, 2001). Since Bitcoin is not really backed by any institution and has no backing by any central bank or institution and because most of the transactions involving acceptance of Bitcoin are voluntary in nature, therefore it does not seem that Bitcoin is an instrument that can be used to create a financial liability. This can be explained further with the help of two examples:
(i) If a person owns Indian rupee notes worth Rs. 500 and everyone stops accepting the currency, he can always go to the Governor of the RBI and claim Rs. 500 from him, however if I own Bitcoins then whether my Bitcoins can be used to buy any goods or services is entirely dependant upon the willingness of third parties to accept Bitcoin as a valuable item.
(ii) If I order a pair of shoes worth Rs. 500 from Online Shopping India | Buy Mobiles, Electronics, Appliances, Clothing and More Online at Flipkart.com and pay for those shoes using Indian currency, then it does not matter if flipkart decides to not accept Indian currency (whether by means of cash, credit card, cheque, etc.) and accepts payment only in Bitcoins. As soon as I give flipkart currency notes or coins worth Rs. 500, my legal obligation to pay for the shoes is fulfilled. On the other hand if I pay for those shoes with Bitcoins then unless flipkart voluntarily accepts payment in Bitcoin, my liability to pay for the shoes will still legally exist till I pay flipkart Rs. 500 in Indian currency.
Therefore it is clear that Bitcoins do not fit into the plain vanilla definition of currency under Indian law. However this does not mean that the RBI cannot regulate Bitcoins or transactions involving Bitcoins. The RBI can very well notify Bitcoins as “currency” and then come out with rules and regulations for Bitcoin transactions. Cynics may argue that this is not possible due to the peer to peer nature of Bitcoins and the Bitcoin network and they would be right to the extent that it may not be physically feasible for the RBI to regulate every Bitcoin transaction, but it would be possible for them to target Bitcoin exchanges which is the entry point for most users of Bitcoin. To sum up, although Bitcoins may not be classified as a currency at present, this does not preclude the RBI from regulating them in the future.
Anyone can accept Bitcoin, rocks or rice as payment as far as the government of India or any of its agencies are concerned. It’s perfectly legal. What’s NOT legal is to refuse payment in Rupees since it’s the legal tender. That said, since Bitcoin is not a legal tender, accepting and making payments is a little bit painful, since you’ll be paying capital gains taxes every time a transaction occurs.
For example, let’s say that a client owes you Rs. 20,000 for some job you did. You offered to take Bitcoin in payment. The price of Bitcoin as of writing this answer is Rs. 5,23,767.55/-. This means your client will pay you 0.03 BTC.
- Client sold 0.03 BTC for Rs 20,000
- Client paid you Rs. 20,000
- You bought 0.03 BTC for Rs. 20,000 at the price of Rs. 5,23,767.55 per BTC
- You bought 0.02 Bitcoin at price Rs. 5,23,767.55, costing you Rs. 10,475.351
- You sold 0.02 Bitcoin at price Rs. 10,00,000/-, earning you Rs. 20,000
- You spent Rs. 20,000 on the said service
- Total capital gain = Rs. 20,000 - Rs. 10,475.351 = Rs. 9,524.649
- Capital gains tax at 30% = Rs. 2,857.39
Even though this transaction is simple enough i.e work in exchange for BTC, the Income tax department won’t see this transaction this way. Instead, this is the transaction history in its books
Now, imagine that on a different day, you require the services of someone else for worth Rs. 20,000.
This time, the price of Bitcoin has risen to Rs. 10,00,000/-.
If you offered to pay in Bitcoin and your service provider has accepted it, then yay, you only get to part with 0.02 BTC!
But the IT department sees your transaction like this
As you can see, you owe Rs. 2.8k in taxe just because you spent in Bitcoin.
This is why making/accepting payments in Bitcoin is not a good idea even though it is legal. It’s a bit of a pain in the Transaction, considering how the rules and regulations have not evolved for bitcoin transactions yet.