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Over the past few years, digitization and technology have taken over everything by a swarm. No one and nothing are spared by this wave. Whether young or aged, whether buying articles or ordering food, everything is now overtaken and governed by technology.

Payments systems specifically have taken a huge turn, especially after demonetization. Post 8 Nov 2016, India has taken a quantum leap towards a cashless economy and digital payments have been taking over since. While previously the only payment methods we discussed were cash and bank, in the last couple of years so many new avenues have come into existence being – USSD, AEPS, UPI, IMPS, Mobile Wallets and it goes on.

However, while the masses have acclimatized to the above, slowly over the last 10 years another currency format has been growing behind the scenes – Cryptocurrencies.

bitcoin is place on the keyboard of the laptop, cryptocurrency trading technology concept

While the above payment methods discussed involve the circulation of actual currency, cryptocurrencies are totally virtual and are in fact a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

This started off way back in 2009 with the most popular of the cryptocurrencies known today – BITCOIN. However, over the past decade not only has Bitcoin gained traction, but a host of other virtual currencies have also cropped up, some notable ones being – Litecoin, Ethereum, Dogecoin, Ripple and so on.

Bitcoins which were initially a dollar a piece, over the years gained value to over $46000 and right now is trading at around $45000 for a single unit. This currency, and other cryptocurrencies for that matter, work on blockchain technology wherein transactions are verified by network nodes through cryptography and recorded in a public distributed ledger.

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires nothing more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second. But the reverse, computing the private key of a given bitcoin address, is mathematically unfeasible. Users can tell others or make public a bitcoin address without compromising its corresponding private key. Moreover, the number of valid private keys is so vast that it is extremely unlikely someone will compute a key-pair that is already in use and has funds. The vast number of valid private keys makes it unfeasible that brute force could be used to compromise a private key. Thus, there is no tracking mechanism for this currency or its owner.

Bitcoin’s anonymity encourages money laundering and other crimes, and therefore while India also has slowly caught up to this rage and trading volumes started skyrocketing among individuals and entities; the Indian Government found the concerns over this currency more worrisome and therefore in February 2018 announced that bitcoin or such other crypto currencies will not be considered as legal tender in India. Further, the RBI also issued a release in April 2018 that any bank or financial institution regulated by RBI will not deal in virtual currencies. However, the Supreme Court last year quashed a ban on banks facilitating crypto trades, and since then not only has investments surged but the government is also toeing the line and preparing draft set of rules to regulate and control crypto trades; looking for a middle path

But then while the same is being regulated in India and many other countries, its importance cannot be understated. Even Facebook had reported to launch its own cryptocurrency in June 2019, both the platform and wallet are still under final development stages, and for now is slated to be launched by end of 2021. Facebook would even offer its employees the choice to take their salary in this currency form.

Now the government has not made trading illegal yet, however there is no support or any resort in case of any scam to the affected parties. An inter-ministerial panel set up by the government to look into this has on June 2019 confirmed that it will soon submit its report to the finance ministry. While the majority are hoping for the government to provide some leniency and not ban this currency, the Reserve Bank of India has maintained its hard-line stance on not allowing privately owned cryptocurrencies in India, but said that it would ‘seriously’ consider developing a sovereign digital currency when the time is ‘appropriate’. A bill to regulate cryptos, ‘Digital Currency Bill, 2021’, has been ready for at least a month now and is awaiting approval from the Cabinet

Killing the aspirations of several private companies experimenting with digital currencies such as Facebook and JP Morgan Chase, and other blockchain enabled cryptocurrencies vying for Indian markets, RBI governor Shaktikanta Das added that currency issuance is a sovereign mandate which will not be handed over to a private company.

However, until then, in the current scenario those involved in this transaction are also subject to the tax regime prevailing over the transactions. While Income tax would be charged on the margin over buy and sell price, this article aims to discuss on the impact of GST on these virtual currencies.

Applicable clauses in GST which have an impact on this are first discussed herewith: –

As per Section 2(52) of the CGST Act – “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

As per Section 2(102) of the CGST Act – “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

The important words to focus here are money and securities-

As per Section 2(75) of the CGST Act – “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;

As per Section 2(101) of the CGST Act – “securities” shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;

As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956 – “Securities” include

  • shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

[(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

[(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

[(id) units or any other such instrument issued to the investors under any mutual fund scheme.]

[Explanation.—For the removal of doubts, it is hereby declared that “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938);]

[(ie)   any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;]

  • Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

  • rights or interest in securities;

So, Cryptocurrencies are neither classifiable as securities nor as money since the same is not recognised by the Reserve Bank of India. Also, since the same is not tangible, it cannot be called as goods also. Resultantly it is classifiable as services.

However, another school of thought is that the same should be classified as goods, going by the FAQ on IT/ITES released by CBIC wherein it has been clarified that where a pre-developed or pre-designed software is supplied in any medium/ storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.

On account of the above ambiguity on classification and more on the taxability itself, news was also doing the rounds that some of the big players in India are planning to approach the Advance Authority of Ruling (AAR) to provide clarity on the queries.

While there are no clear guidelines on this transaction structure till date, but whether classifiable as goods or services, cryptocurrencies are, as of today taxable in India @ 18% and therefore trading in this segment while can be highly rewarding, would also however definitely entail a tax obligation.


Author Bio

I have recently forayed into my own practice from April 2021 onwards. Previously was Partner in Saraf & Chandra and was involved in Risk Based Audit, Operations Audit and Indirect Tax advisory. I had set up and was heading the IDT vertical of the firm dealing in consultancy, opinions, complian View Full Profile

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July 2024