Cryptocurrency, its history & considerations for tax in India

Cryptocurrency

Crypto in India has always been something which is not understood by majority masses. India having one of the largest economy in the world, would always fear something which has a potential to replace the fiat currency primarily because it does not have a know how to curb the wrong practices which can result out of crypto trading. One must learn out of the technology which is used by the crypto traders and the platforms instead of criticizing it. Since the time of evolution, the Indian Regulators have been concerned about the use of crypto currency for illegitimate transactions. Having said that, RBI sandbox had explicitly excluded the usages of cryptos despite that fact that other regulators allow the usage of cryptos in their sandbox with a cap on it. There should be no harm in regulators allowing such usage to evolve along with the technology.

Updates

RBI had earlier restricted all the banks from encouraging the crypto traders/ platforms from operating a bank account in India. The banks had therefore paused their operations with such traders/ platforms after giving them a window. After getting these regulations, the crypto platforms had shut their practices in India and moved to other jurisdictions which are more crypto friendly. This had even led to loss of many such jobs.

Amid such actions, the trades/ platforms of such crypto currency had received notices from other departments such as income tax and GST in order to explain the transactions and loss of revenue to the Indian Government. Many such responses were submitted by all such assesses, however, no further communications have been so far received by such assesses primarily since there is no clarity or treatment specified specifically for crypto trades/ profits in these acts/ rules. Subsequently, early this March, Supreme Court had come with its ruling wherein it ordered RBI to remove its curbs which were put in place for crypto traders/ platforms.

After this ruling, RBI had filed a review petition with the SC which was scheduled for hearing in April 2020, but in this lockdown, it can be expected to get prolonged. It is also expected that the RBI may get regulations in place to regulate the crypto market which is proposed to restrict the cryptos to be used for the purpose of payment systems. Having said that, only trades between the cryptos would be allowed which would probably be required to be reported on regular intervals to the regulator. This would curb a lot of regulations on the platforms and exchanges.

Taxation related

Direct Taxes

Having understood the approach of the regulators towards the crypto trades, it is very important for the crypto platforms/ exchanges and trades to understand the tax exposure which they carry for carrying out the trades in such virtual currencies:

Currently, there are more than 1500 types of crypto currencies which are being traded on multiple exchanges and platforms. Further, the traders who trade on this technology driven platforms always have questions on the tax treatment. It is to be noted that the Income-tax department or the department of indirect taxes has not released any such specific treatment of such crypto income which is accrued by such trades/ platforms/ exchanges which gets even more ambiguity on the treatment.

A lot of times, the treatment is dependent on the strategies which are used by the trader to multiply its cryptos. Its more simpler for the exchanges and platforms to understand the tax treatment since they have to pay taxes on the income accrued, unless they have stocked up the cryptos themselves. Earlier, since the cryptos were strictly restricted for use by the RBI in India, there was a stand taken by the tax payers by assuming such cryptos at nil value as these did not have real value in Indian markets as they could not be monetized readily in India. However, now that the SC has asked the regulator to remove such curb and since many of the bankers have started allowing such trades again, a question is to whether such accruals in cryptos by the traders is to be offered to tax? This would have to be analysed case to case.

It is always advised that a conservative approach is taken when there is no clarity available from the department on the treatment. The players in market accrue income in the form of trading, arbitraging, mining, peer to peer, etc. which may or may not be monetised, but the relevant exposure needs to be considered.

Indirect Taxes

GST is another question which such players in market are not clear about, considering no clarification on such transactions has been provided by the department of indirect taxes, it is important that one takes a conservative view. Many exchanges in India are currently paying GST on the fee portion collected from the customers for paying the same to the department. The traders also need to analyse the implications of GST on the P2P sales which are executed by them since those have profit element too. It is important to note that the term cryptocurrencies have not been included or defined anywhere in the act/ rules and therefore deciding the treatment of such transactions are very important before the same are made.

Conclusion

The market of crypto currency is very immature in India and the assesses dealing in such trades are unaware of the real treatment in accounts and tax. It is therefore important for the regulators to come out with some clarity. Delaying in getting proper clarity and treatment would lead to different treatments being given by different assesses plus this would further increase the scope of reopening of the assessments by the authorities to tax the past profits of the assesses. The tax authorities may consider getting in transaction tax approach on these trades where each transactions can be considered to be separately taxes like STT (security transaction tax) since the volumes of such trades are huge. Additionally, reporting systems can be introduced to ensure completeness. This can be one of the best ways to get these transactions into the taxation umbrella.