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Cross Border Transactions - Cryptocurrency and Foreign Exchange Management Act (FEMA) - Technology - India

The document discusses cryptocurrency transactions under India's Foreign Exchange Management Act (FEMA). It analyzes how cryptocurrencies could be classified under FEMA and the legal implications. Cryptocurrencies are classified as "goods" rather than "currency" or "foreign exchange." Cross-border cryptocurrency transactions by Indian residents are considered "current account transactions" under FEMA. However, such transactions currently violate FEMA since cryptocurrency is not legal tender in India and the laws around cryptocurrency are still developing. Regulations are expected to be formulated to promote and regulate both domestic and international cryptocurrency transactions.

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76 views3 pages

Cross Border Transactions - Cryptocurrency and Foreign Exchange Management Act (FEMA) - Technology - India

The document discusses cryptocurrency transactions under India's Foreign Exchange Management Act (FEMA). It analyzes how cryptocurrencies could be classified under FEMA and the legal implications. Cryptocurrencies are classified as "goods" rather than "currency" or "foreign exchange." Cross-border cryptocurrency transactions by Indian residents are considered "current account transactions" under FEMA. However, such transactions currently violate FEMA since cryptocurrency is not legal tender in India and the laws around cryptocurrency are still developing. Regulations are expected to be formulated to promote and regulate both domestic and international cryptocurrency transactions.

Uploaded by

Raveena Pushpa Chandan
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© © All Rights Reserved
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12/2/21, 12:23 PM Cross Border Transactions: Cryptocurrency And Foreign Exchange Management Act (FEMA) - Technology - India

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CONTRIBUTOR

ARTICLE

India: Cross Border Transactions: Cryptocurrency And Foreign


Exchange Management Act (FEMA)
07 January 2021

by
Vijay Pal Dalmia
Vaish Associates Advocates

Your LinkedIn Connections

with the authors

Article by Vijay Pal Dalmia, Advocate, Supreme


Court of India and Delhi High Court, Partner & Head of
Intellectual Property Laws Division, Vaish Associates Advocates,
India

INTRODUCTION
Cross Border Transfer of cryptocurrency is a significant aspect
of its being as cryptocurrencies are traded
through online
platforms and these platforms facilitate the exchange of
cryptocurrency into another currency
including a fiat currency.
This raises questions under India's foreign exchange control
law, i.e., the Foreign
Exchange Management Act (FEMA). This article
intends to analyze the possible categorization of
cryptocurrencies
under FEMA and the legal implications to follow.

CLASSIFICATION UNDER FEMA


To begin with, according to the Foreign Exchange Management
(Exports of Goods & Services) Regulations,
2015, goods and
software are treated in the same way and 'software means any
computer program,
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' and as the FEMA does not
provide for an express definition
of goods, and the inclusive
definition covers software.

In the landmark judgment of Tata Consultancy Services v.


State of Andhra Pradesh,1 the constitution bench of
Supreme
Court decision on the question that whether certain software would
fall within the meaning of
goods under the state sales tax law and
it was held by the majority that the term goods used in the
Constitution of India is very wide and under the relevant Act it
includes all types of movable properties
irrespective of tangible
or intangible and a transaction sale of computer software is a sale
of goods within the
meaning of relevant sales tax act. In the
concurring opinion, Hon'ble Justice Sinha laid down a
three-part test
for software to classify as goods.2

However, the judgment is not absolutely in the context of


cryptocurrency or its definition under FEMA, but it
provides
significant interpretational guidance as there is no definition of
goods under FEMA.

Moving forward, it can be observed that cryptocurrencies are


intangible and are made, marketed, and stored
on physical servers.
They can be bought and sold, transmitted, transferred, delivered,
stored, and possessed.
Cryptocurrencies like Bitcoin and Ethereum
are used for various purposes like a store of value, transfer of
value, micropayments, and decentralized applications. These
features and the demand for cryptocurrencies
for these purposes
indicates their utility. Therefore, it can be concluded that based
on the text of the law,
cryptocurrencies are closest to the nature
of goods under FEMA and can be classified accordingly.

The definition of currency under FEMA is inclusive and includes


'any instrument which can be used to create a
financial
liability'.3 The cryptocurrencies are not named
or indicated under the enumerated categories. The
term currency
notes means and includes cash in form of coins and banknotes.4
Further, in response to an RTI
request, the RBI also clarifies that
it does not classify cryptocurrency as currency under FEMA.5
Therefore, the
cryptocurrencies do not fall under the purview of
the term 'currency' under the FEMA as;

It is not included under the


definition of currency under the Sec 2(h) of the FEMA and
Not notified by the RBI as a
currency.

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Foreign Exchange is defined as a Foreign Currency under the Sec


2(n) of the FEMA,6 and Foreign Currency as
defined by
FEMA under Sec 2(m) is a currency other than an Indian Currency.7 But
the Cryptocurrencies are
not considered currency under the FEMA and
therefore the cryptocurrency is neither foreign currency nor
foreign exchange under the FEMA.

IMPLICATIONS UNDER FEMA FOR TRADING IN CRYPTOCURRENCY


Cryptocurrency can be classified as goods and that is why if a
person resident in India,8 enters into
transaction with a
person resident outside India, it will be considered as export and
import and accordingly,
the provisions of FEMA will apply to such
transactions. Moreover, under FEMA, all the transactions with a
person resident outside India are categorized as capital and
current account transactions.

a. Classifying Cryptocurrency
Transaction as Capital Account Transaction
It is defined by sec 2(e) of FEMA as a transaction that alters
the assets or liabilities outside India of
persons resident in
India or assets or liabilities in India of persons resident outside
of India.

There are two case scenarios here to answer the question of


categorization

In the case of the purchase of cryptocurrency by the buyer from


a person resident outside India, the
cryptocurrency gets
transferred into the buyer's wallet along with the exclusive
rights and the location
of the assets will be India for all legal
purposes. In the other case where the seller sells it to the person
resident outside India and the cryptocurrency gets transferred to
such person and the seller will have
no rights

In both cases, the transaction does not alter the assets or


liabilities of the seller and buyer outside India,
and therefore,
cannot be classified as capital account transactions.

b. Classifying Cryptocurrency
Transaction as Current Account Transaction
Current Account Transactions are defined by sec 2(j) of the FEMA
as a transaction other than a capital
account transaction and list
out four categories of the transactions classified as current
account
transactions. The trade-in cryptocurrency can be in the
following manner:

Category 1- Purchase of Cryptocurrency from a person resident


outside India through foreign exchange
on payment by fiat currency
to a person resident outside India or;

Category 2- Payment by Cryptocurrency to a person resident


outside India for purchasing goods and
services from a person
resident outside India; or

Category 3- Payment for Cryptocurrency to a person resident


outside India in consideration for
acquiring other cryptocurrencies
from persons resident outside India.

Therefore, any payment made or received in connection with a


transaction of cryptocurrency by an
Indian Resident with a person
from any of the above categories will be considered as payment in
the
context of foreign trade and would fall under the
classification of 'Current Account Transaction' under
the
FEMA.9

CROSS- BORDER TRANSACTIONS AND CRYPTOCURRENCY


When the Cryptocurrency is being transacted outside India by
Indian Residents as a mode of payment of
services rendered and
goods sold by a non-resident, such transaction is most certainly to
be classified as an
export of goods under the Foreign Exchange
Management (Export of Goods and Services) Regulations 2015,10
and the Master Directions on Export of Goods and Services.11
These regulations require the full value of any
exports to be
received through authorized banking channels only and any set-off
import payments to be
received only through a process facilitated
through a bank. This leads to a situation where a cross-border
barter would not be permitted. Therefore, a cross-border transfer
by Indian residents involving
cryptocurrency without any fiat
currency through an authorized banking channel violates Export
Regulation.

CONCLUSION
The laws regarding Cryptocurrency is in grey currently as it is
not considered currency or legal tender in India.
The Enforcement
Directorate of FEMA readily raids many Cryptocurrency exchanges
operating in India as they
tend to violate the foreign exchange
laws. In conclusion, a person resident in India entering into a
transaction
with a non-resident for the trading cryptocurrency is
certainly violating the foreign exchange laws of India. The
regulations with regards to cryptocurrency are yet to be formulated
in India and the regulation is expected to
promote and regulate
both domestic and international transactions dealing with
cryptocurrency.

By

Vijay Pal Dalmia, Advocate

Supreme Court of India & Delhi High Court

Email id: [email protected]

Mobile No.: +91 9810081079

Linkedin: https://www.linkedin.com/in/vpdalmia/

Facebook: https://www.facebook.com/vpdalmia

Twitter: @vpdalmia

AND

Kritika Singh

Maharashtra National Law University, Aurangabad

[email protected]
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12/2/21, 12:23 PM Cross Border Transactions: Cryptocurrency And Foreign Exchange Management Act (FEMA) - Technology - India

Footnotes

1. Tata
Consultancy Services v. State of Andhra Pradesh (2004)

2.
'Goods may be tangible property or intangible property. It
would become goods provided it has the attributes thereof having
regard to (a) its utility; (b) capable of being bought and sold;
and (c) capable of transmitted, transferred, delivered, stored, and
possessed. If software whether customized or non-customized
satisfies these attributes, the same would be goods.

3.
Section 2(h) of the FEMA.

4.
Section 2(i) of the FEMA

5.
India - The Virtual Currency Regulation Review - Edition 3 - TLR -
The Law Reviews

6.
Section 2(n) of the FEMA.

7.
Section 2(m) of the FEMA.

8.
Section 2(v) of the FEMA

9.
Trading in Virtual Currencies: An analysis under foreign exchange
laws of India - Lexology

10.
Foreign Exchange Management (Export of Goods & Services)
Regulations, 2015, FEMA 23(R)/2015-RB.

11.
Master Directions on Export of Goods and Services FED Master
Direction No. 16/2015-16 Dated 1 st January 2016 amended up to
12th
January 2018.

© 2020, Vaish Associates Advocates,

All rights reserved

Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy
Marg New Delhi-110001 (India).

The content of this article is intended to provide a general


guide to the subject matter. Specialist professional advice
should
be sought about your specific circumstances. The views expressed in
this article are solely of the authors of this
article.

AUTHOR(S)

Vijay Pal Dalmia


Vaish Associates
Advocates

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