What is Cryptocurrency :

A cryptocurrency is a type of currency which uses digital files as money. Usually, the files are created using the same ways as cryptography (the science of hiding information). Cryptocurrencies use ‘decentralized control’, which means that they aren’t controlled by one person or government.

How does it Work :

Cryptocurrency is a form of payment that can be exchanged online for goods and services. Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.

Trading of Cryptocurrency whether Sale of Goods or Services Under GST :

Trading may attract 18 percent GST. Buying and selling of crypto currencies will be considered under the category of supply of goods. Other related facilitating transactions will be counted under services and these would include supply, transfer, storage, accounting, among others.

Taxation Issues :

Cryptocurrencies have been subjected to the spotlight of the decade and have been grabbing the attention of the tax authorities essentially due to the high prices at which they were seen trading on exchanges in India and across the globe and the regulatory mechanism of taxation has to be determined looking at the current legal landscape.

The Constitution of India under Article 246 grants the power to levy taxes to the Parliament as well as the state legislatures to impose taxes. Article 265 provides that no tax can be imposed or collected without the authority of law. With the introduction of the Constitution (One Hundred and First Amendment) Act, 2016, the Parliament made several amendments concerning the imposition of Goods and Services Tax (‘GST’) including Article 246A, wherein exclusive power was given to the Parliament to make laws about interstate trade and commerce. Furthermore, Schedule VII lists the subject matters where Parliament and state legislatures can impose taxes.

Accordingly, any transaction involving cryptocurrency can be analyzed from two viewpoints – income and expenditure. The nature of the transaction  and parties to the transaction would decide if it may be taxable under the Income Tax Act, 1961, or Central Goods and Services Tax Act, 2017, and other laws.

As it is well established that the regulatory framework regarding cryptocurrencies is uncertain, this article tries to analyze the taxation (or non-taxation) by considering them as both goods and currency, two major approaches currently prevalent across the world.

The treatment of cryptocurrency as goods/property implies that the supply of bitcoins is a ‘taxable supply’ and hence subject to GST. Technically, a supply of cryptocurrency as goods or property in exchange for other virtual/real goods should fall within the ambit of ‘barter transaction’ since bartering is simply an exchange of one good for another.

Even in its most innovative form, any barter transaction has two essentials –

1. direct exchange of goods or services for other goods/services and

2. no use of money.

Before GST,  under the various state VAT laws, the incidence of tax arose when there was a sale of goods in exchange for cash, deferred payment, or any other valuable consideration. The expression ‘any other valuable consideration’ leaves out a wide scope of ambiguity, since the term should typically derive reference, ejusdem generis, from its preceding terms (i.e. cash and deferred payment), and therefore, must not include an exchange of goods for other goods. This view was reiterated by the Supreme Court in the case of Sales Tax Commissioner v. Ram Kumar Agarwal, a transaction of gold bullions in exchange for ornaments was excluded from the definition of sale under Sec 2(h) of the Sale of Goods Act, 1930. However, the position is similar to when a transaction is used as a device to conceal monetary consideration, courts may unravel the device to include it within the ambit of sale.

An approach where cryptocurrencies are considered as goods means that some transactions would be taxed twice – at first on supply (otherwise exempted for a transaction in money) and secondly on consideration, unnecessarily leading to higher tax. This higher incidence of taxation puts the businesses operating in cryptocurrencies at a huge disadvantage which also diminishes their purchasing capacity. The issue gets further complicated in cases of international transactions.

Proposal For GST @ 18 % :

Media reports suggest that the Central Economic Intelligence Bureau (CEIB) has raised a proposal to the Central Board for Indirect Taxes and Customs (CBIC) to bring cryptocurrency exchanges and platforms under the GST purview. The salient features of CEIB’s proposals in this regard, as available in public domain, are excerpted below:

  • The act of cryptocurrency mining could be treated as a supply of service as it generates cryptocurrency and charges transaction fees, and as such, should classify as an intangible asset and attract a GST of 18%
  • Taxpayers operating as cryptocurrency miners will be required to register under GST if their annual revenue exceeds ₹20 lakh. GST will be liable on the transaction fee and/or the reward viz. currency mined. Consider bringing wallet service providers under the GST purview.
  • Trading of cryptocurrency and other related transactions like transfer, storage, accounting etc are also likely to be considered as an act of supply and could be taxed. The transaction value in INR or an equivalent freely convertible foreign currency will be used to determine the value of cryptocurrency and thereby the transaction and subsequent tax liabilities.
  • In cases where the buyer and seller are registered as Indian residents and operators, the transaction should be treated as a supply of software. International cryptocurrency transactions by companies registered in India will be treated as import or export of goods and as such will be liable to IGST. Another major reason to consider bringing cryptocurrencies under the GST purview is to curb money laundering and undermining of legitimate currencies.

Conclusion :

The cryptocurrencies  in today’s scenario has the potential to enhance the backbone of India’s digital infrastructure and also securing all the transactions made on the digital network. In this situation levying of taxes on the transactions involving cryptocurrency should be considered as a welcoming move  by the government and should not be seen as a restriction. It is a two way street for the crypto transactions to be traced and used legally as well as generating income for the government to be used efficiently. It also helps to provide an ideal atmosphere to assure the traders that their money is safe and the risks involved in trading are also mitigated or reduced to a certain level.

Every effort has been taken to provide an insight about this emerging  topic and to cover all important areas of it , any suggestions and improvements will be welcomed and highly appreciated.

Compiled and Written by : Vaibhav Singh – GST Practitioner

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Qualification: Student - CA/CS/CMA
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June 2021