Indirect Tax applicability in cryptocurrency Classification and taxability of virtual currency (Bitcoins)
‘Indirect Tax applicability in cryptocurrency’
A virtual currency has no physical form, and it does not provide its owner with any inherent rights to property or another currency. Traditionally, the central bank of a sovereign nation creates currency. However, no centralized authority, governmental or otherwise, controls the digital system.
Nearly twenty years ago, the internet disrupted the world and started a new era of technological supremacy. Today, with the rise of cryptocurrencies and its underlying technology, we stand at the helm of another such revolution. Cryptocurrencies like bitcoin are decentralised, digital currencies relying on a peer-to-peer network which operates without the need for a third-party intermediary like the Reserve Bank of India. Coupled with lack of regulatory guidance, its unique technical aspects create huge complications in its taxation.
This project focuses on what cryptocurrencies are, why they are important, and the prevailing regulatory structure concerning them. It overviews the complete landscape for taxation of cryptocurrencies like bitcoin, analysing the indirect tax structure, particularly after the implementation of Central Goods and Services Tax Act, 2017, while also addressing the issues concerning the evasionary practices.
Virtual currency is an emerging financial medium which may be used to pay for goods or services, or held for investment. These virtual currencies are a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency i.e., the coin and paper money of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance but it does not have legal tender status in any jurisdiction.
Bitcoin is one example of a convertible virtual currency. Bitcoin is a cryptocurrency, a form of payment that uses cryptography to control its creation and management, rather than relying on central authorities. Unlike usual forms of currency, it is in virtual form and may be used to transact in physical as well as online transactions. Essentially, bitcoin is a snippet of codes based on algorithm first identified in a self-authored paper by Satoshi Nakamot. The creation and transfer of bitcoins is based on open source cryptographic protocol managed in a decentralized manner. Bitcoin network shares a public ledger called the “block chain”. The ledger contains details of every transaction processed, thereby, allowing user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, permitting all users to have full control over sending bitcoins from their own bitcoin addresses. Anyone can process transactions using the computing power of specialized hardware. This process is called “mining”. There are three primary ways to obtain Bitcoin:
1. Mining new ones.
2. Buying on an exchange; and
3. Accepting them for goods and services.
The RBI Act does not specifically define currency, but it does define foreign currency to have the same meaning as in Foreign Exchange Regulation Act, 1973, which has since been replaced by FEMA.
‘Currency’ has been defined under FEMA to include, ‘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’. FEMA defines ‘foreign currency’ as any currency other than Indian currency. Definition of ‘Indian Currency’ under FEMA states that Indian currency is the currency which is expressed or drawn in Indian Rupees.
The term currency notes are specifically defined in Section 2(i) of FEMA to mean and include cash in the form of coins and bank notes. This definition therefore does not cover Bitcoin which are not issued either under the Coinage Act or RBI Act.
Section 22 of the RBI Act provides that RBI has the sole right to issue bank notes and Section 26 provides that bank notes shall be legal tender in India. From the above it appears that while Bitcoin have several features of a currency or legal tender it is not bank notes and is consequently not legal tender in India. Accordingly, it is left to be examined if it falls within the purview of securities, derivatives, or commodities.
The question at hand is whether a ‘virtual currency’ such as Bitcoin can be said to come under the purview of the definition of currency above. The answer to this question can be found in the maxim ‘expressum facit cessare tacitum’. The maxim represents the principle ‘when there is express mention of certain things, then anything not mentioned is excluded’. The maxim has been recognized by Indian courts and was also relied upon by the Supreme Court in Shankara Rao Badam & Ors. v. State of Mysore & Anr . Considering the provisions of the law, it can be reasonably concluded that ‘virtual currency’ should be considered excluded from the definition of currency. While it may be argued that it may fall under ‘such other similar instruments’ under Section 2(h), but such ‘other instruments’ need to be specifically notified by the RBI which is not the case. There is no such declaration in respect of crypto currencies in general or Bitcoin in particular. RBI has merely advised the public to be cautious regarding the trading of virtual currencies. Therefore, under the provisions of existing law, Bitcoin are not currency.
Goods and Commodity
The term commodity has not been defined anywhere under the law in India. In the case of Tata Consultancy Services v. State of Andhra Pradesh it was stated that a commodity is generally understood to mean goods of any kind, something of use or an article of commerce.
Since Bitcoin are an intangible asset, it leaves open the possibility of being characterized as a commodity under Indian law. Bitcoin may very well fall under the meaning of “goods” and may be covered under the Sale of Goods Act. The act defines “good” as:
“every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”
Although there is no formal Bitcoin exchange in India at present there are numerous websites through which Bitcoin can be bought and sold. At present, as many as 23,000 Indians possess e-wallets where their digital currency is stored.
Bitcoin wallets keep a secret piece of data called a “private key” for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they have come from the owner of the addresses. Thus, it can be stated that, it can be stored and transferred. Therefore, in the light of the above discussion and case law, Bitcoin may be liable to tax.
In Tata Consultancy Services v. State of Andhra Pradesh, the Supreme Court stated that, “computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (Shrink-wrapped) or uncanned (customized), whether it comes as part of computer or independently , whether it is branded or unbranded, tangible or intangible; is a commodity capable of being transmitted, transferred, delivered, stored , processed, etc. and therefore as a ‘good’ liable To sale tax.” Similarly, Bitcoin being of an incorporeal nature may fall under the ambit of the term “goods”.
Being a relatively unregulated form of currency, there is not much jurisprudence available which discusses the ability of the citizens in India to transact through bitcoins. Broadly speaking, any transaction involving bitcoins could be analysed from two viewpoints – income and expenditure. Depending upon the nature and parties to the transaction, it may be taxable under the Income Tax Act, 1961 (‘ITA’) (in case of income), or Central Goods and Services Tax Act, 2017 (‘Act’) and other laws (in case of expenditure).
When taxation is on income, it may be on Bitcoin representing such income or on Bitcoin representing asset value. Additionally, it may also be on expenditure – cost of acquiring Bitcoin, such as Central Sales Tax, Value Added Tax or Service Tax.
Treatment of bitcoins as goods/property would mean that supply of bitcoins is a ‘taxable supply’ and hence subject to GST. However, a supply of bitcoins as goods or property in exchange of other virtual/real goods should technically fall within the ambit of ‘barter transaction’ since bartering is simply an exchange of one good for other goods. After the implementation of GST, tax under the Act is levied on supply of goods or services or both, and ‘supply’ includes barter made or agreed to be made for a consideration in the course or furtherance of business. Hence, there is no ambiguity that barter transactions will not be tax-free under GST. Three conditions may arise in such a scenario:
i. Transactions involving exchange of cryptocurrencies,
ii. Transactions involving exchange of cryptocurrencies for goods and services, and
iii. Transactions involving exchange of cryptocurrencies for goods and services through intermediary.
Income Tax Act
Taxation of income in India is governed by the provisions of the Income Tax Act, 1961 (“ITA”). Under the ITA, residents are subject to tax in India on their worldwide income, whereas non-residents are taxed only on income sourced in India. However, non-residents, who are resident of a country with which India has signed a tax treaty, have the option of being taxed as per the tax treaty or the ITA whichever is more beneficial. Every person, who is an assessee and whose total income exceeds the maximum exemption limit, should be chargeable to the income tax at the rates prescribed. Bitcoin may be considered to be currency or a capital asset. However, this is not yet clear under Indian law which makes it difficult to conclude how it may be taxed.
Central Sales Tax / Value Added Tax
The Central Sales Tax Act, 1930 (“CST Act”) provides for the levy, collection and distribution of taxes on sales of goods in the course of inter-state trade. For a Bitcoin transaction to be taxed under the CST Act, there should be a sale – i.e., transfer of property and transfer of goods.
“Sale” is defined under Section 2(g) of the CST Act, as follows:
“sale”, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes, –
i. a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
ii. a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;”
The essentials that need to be fulfilled by a transaction to be categorized as sale are:
i. Transfer of property by one person to another in goods.
ii. Payment in the form of cash, deferred payments or any other valuable consideration.
Where Bitcoin is exchanged for currency or any other consideration, the above essentials of sale should be satisfied. However, it also needs to be established whether Bitcoin can be considered as ‘goods’ under the CST Act. Goods under CST act are defined as:
“Goods” includes all materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities;”
Bitcoin may fall under the category of commodity and thus come under the definition of goods under the CST Act and thus fulfilling the essentials of a transaction of sale. Similarly, “MVAT Act” provides that tax should be levied on goods mentioned in Schedule B, C, D and E of the MVAT Act. Schedule C, entry 39 includes goods of “intangible or incorporeal nature” as notified from time to time by the State Government in the Official Gazette. The State Government pursuant to the above sections has issued notifications to classify various kinds of intellectual property including patents, trademarks, copyright etc. as goods.
However, MVAT Act clearly states that for a property to be considered as “goods” for tax purposes, it should be notified by the Government. Virtual currencies like Bitcoin have not been notified are hence should not be liable to be taxed as goods under the abovementioned provisions and consequently, transfer of Bitcoin cannot be taxed under MVAT Act.
In another situation, where Bitcoin are exchanged for goods, Bitcoin can be considered as “consideration in kind”. The definition of sale under the CST Act, as stated above, provides that a sale is said to have been made when any transfer of goods takes place for cash, deferred payment or “other valuable consideration”. However, the issue that needs to be considered is whether Bitcoin can be considered as “other valuable consideration”. Courts have, on many occasions delved into the meaning of this phrase. The Supreme Court in the case of Devi Das Gopal Krishna and Others v. State of Punjab while interpreting the same phrase in the Punjab General Sales Tax Act has opined:
“Expression “valuable consideration” in the definition of “sale” takes colour from the preceding expression “cash or deferred payment” and therefore the consideration for sale can only mean some other monetary payment in the nature of cash or deferred payment and would not comprehend a transaction in the nature of barter.”
Hence, the coverage provided by this definition is to be ascertained on case to case basis since there is no straight jacket formula to know what will constitute as “valuable consideration”.
Service tax is levied by the central government at12.36% on all services provided in India except certain specified services. Service providers can take credit for service tax paid on input services utilized and for excise duty paid on inputs and capital goods (barring certain specified inputs). Services provided outside India are not subject to service tax in India. Typically, services are considered to be provided in India if the service recipient is located in India (even though the services may actually be provided outside India), except when specifically provided otherwise. In case of online information and database access or retrieval services, it has been specifically provided that the services would be construed to be provided at the location of the service provider.
For service tax to apply, Bitcoin needs to fall under the category of “taxable service” (charging section). “Taxable Service” is defined in Section 65(105) of the Chapter V of the Finance Tax Act, 1994. Here it may fall under Clause (zh) which states that taxable service includes services to any person, by [any person], in relation to on-line information and database access or retrieval or both in electronic form through computer network, in any manner; or Clause (zzze) stating “to its members, [or any other person], by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount”.
Therefore, the act of mining may be considered as a taxable service in terms of the clauses under the Finance Act as stated above.
Transfer of Bitcoin itself may not attract service tax since service tax is leviable on provision of services and not transfer of goods. Unless there is a service which is provided in relation to transfer of Bitcoin or mining of Bitcoin, service tax may not be levied on Bitcoin related transactions. However, Section 67 (1) (iii) contemplates receipt of consideration in kind or in some other manner which is not ‘ascertainable’ and consequently, merely because consideration has been made in the form of Bitcoin the transaction will not be exempted from service tax.
While considering this aspect, several issues arise relating to (i) parties to the transaction (ii) place of supply of the service (iii) consideration (iv) point of levy of tax, etc.
Under the erstwhile service tax laws, ‘service’ meant any activity carried out by a person for someone else for consideration, whereas a ‘person’ included, inter alia, individuals, HUFs, companies, firms, limited liability partnerships, body corporates, co-operative societies, local authorities and every artificial juridical person not covered within the scope of the definition. These definitions have found recognition in GST too.
The essential elements for taxing a service therefore includes (i) supply of taxable services, (ii) in furtherance of a business (iii) for a consideration and (iv) a bene t of service to be provided by a party (service provider) in favour of another party (service receiver), unless any of these are specifically exempt under the Act. There must also be a direct link between the consideration and the service provided, based on a contractual relationship.
Assuming the mining activity is done in furtherance of business, any transaction of mining, prima facie appears to be a ‘service’ within the am- bit of the Act, since it is a supply of computing power (service), by the bitcoin miner (service provider) to the users of bitcoin system (service recipient) in exchange for bitcoins. Here, though the recipient is not identifiable, it may be included within the ambit of the ‘body of individuals’ and accordingly, the value generated would be considered to be inclusive of GST.
It is also essential to note that any activity performed without consideration is outside the ambit of ‘supply’ under GST. In cases of bitcoin mining, not every miner is rewarded with bitcoins for solving cryptographic algorithms, as mining is a competitive process whereby only successful miners are rewarded with new bitcoins. Thus, an unsuccessful supply of computing power would not be taxable under GST.
In India, approximately one-fifth of the population remains un-banked. For individuals not having access to basic credit facilities, banking alternatives such as virtual currencies could provide an unparalleled solution due to their universal access, low transaction costs, and secured infrastructure.
In comparison to other forms of legislations, the laws of taxation should continuously evolve to discourage evasionary practices. Although the success of bitcoins as a medium of exchange is not factual, it seems highly promising and revolutionary and therefore demands serious thought. Unlike major economies, India is yet to come up with a regulation to govern cryptocurrencies, let alone to determine its tax consideration. It is proposed that KYC norms/anti-money laundering standards currently applicable to financial institutions and banks be extended to bitcoin exchanges and wallet operators, as they remain the point of transaction in most cases.
Nevertheless, given what the future holds for bitcoins and block- chain technology, there is no better time than now to establish clear rules and regulations both in relation to regulatory aspects and taxation, to subsequently ensure their stability and security.
1. Devi Das Gopal Krishna and Others v. State of Punjab,  20 STC 430 (SC)..9
2. Shankara Rao Badam & Ors. v. State of Mysore & Anr,  AIR SC 1416………5
3. Tata Consultancy Services v State of Andhra Pradesh, 271 ITR 401 …….5
4. Vijaya Aluminium Industries v. State of Andhra Pradesh,  103 STC 508…..9
1. Provision of Services Rules, 2012………….9
2. Section 2 (102), Central Goods and Services Tax Act, 2017………10
3. Section 2 (84), Central Goods and Services Tax Act, 2017……..10
4. Section 2, The Sale of Goods Act 1930………..5
5. Section 2(i), Foreign Exchange Management Act 1999……….4
6. Section 2(m), Foreign Exchange Management Act 1999……4
7. Section 2(q), Foreign Exchange Management Act 1999………4
8. Section 6, Maharashtra VAT Act 2002……………..8
9. Section 65B(44), Finance Act, 1994………..10
10. The Central Goods and Services Tax Act, 2017, § 9(1)…………7
1. Reserve Bank of India, Master Circular, Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under Prevention of Money Laundering Act, (PMLA), 2002, RBI/2014-15/70………….12
1. Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’……….3
1. Anthony Volastro, CNBC Explains: How to Mine Bitcoins on your Own, January 23, 2014. 6
2. Keerthik Sasidharan, Cryptocurrency: An Idea Whose Time Has Come, June 4, 2017….. 3
3. Pawan K. Aggarwal, Incidence of Major Indirect Taxes in India, p. 14-16……7
4. The Economic Times, Government Steps Up Vigil On Bitcoin Transactions, May 30, 2017. 6
5. Vikas Dhoot, Waking up to Bitcoins, Virtual Currencies, Govt Sets up Panel to Recommend Regulations, April 12, 2017……..3
1. Brett Scott, How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance?, United Nations Research Institute for Social Development Working Paper Group, Paper No. 2016-1, 2016……….11
2. Nicholas A. Plassaras, Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF, 14 Chicago Journal of International Law, 2013, p. 378 – 407………..3
1. EY-ASSOCHAM Knowledge Report, Evolving Landscape of Financial Institutions in India, July, 2016. Available at <http://www.ey.com/Publication/vwLUAssets/ey-evolving-landscape- of-micro nance-institutions-in-india/$FILE/ey-evolving-landscape-of-micro nance-institu- tions-in-india.pdf>……………11
2. International Monetary Fund, Virtual Currencies and Beyond: Initial Considerations….. 4
3. Jerry Brito, Andrea Castillo, ‘Bitcoin: A Primer for Policymakers’, 2013………….. 3
1. What is Bitcoin?’, <http://www.psalegal.com/upload/publication/assocFile/ENewslineApril2014.pdf>……..3
1. Notification No. No. VAT-1505/CR-114/Taxation-………………8
 Keerthik Sasidharan, Cryptocurrency: An Idea Whose Time Has Come, June 4, 2017. Available at <http://www.thehindu.com/opinion/columns/cryptocurrency-an-idea-whose-time-has- come/article18714908.ece>.
 Vikas Dhoot, Waking up to Bitcoins, Virtual Currencies, Govt Sets up Panel to Recommend Regulations, April 12, 2017. Available at <http://www.thehindu.com/business/Economy/wak- ing-up-to-bitcoins-virtual-currencies-govt-sets-up-panel-to-recommend-regulations/arti-cle17951305.ece>.
Jerry Brito, Andrea Castillo, ‘Bitcoin: A Primer for Policymakers’, 2013. Available at <http://mercatus.org/sites/default/files/Brito_BitcoinPrimer.pdf>.
Bitcoins, Thomson Reuters. Available at <http://thomsonreuters.com/business-unit/legal/digital-economy/Bitcoin-101.pdf>.
Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, <http://Bitcoin.org/Bitcoin.pdf> accessed 31 March 2016
 Nicholas A. Plassaras, Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF, 14 Chicago Journal of International Law, 2013, p. 378 – 407.
‘What is Bitcoin?’, <http://www.psalegal.com/upload/publication/assocFile/ENewslineApril2014.pdf> accessed 2 April 2016
 International Monetary Fund, Virtual Currencies and Beyond: Initial Considerations. Available at <https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf>.
 Section 2(m), Foreign Exchange Management Act 1999.
 Section 2(q), Foreign Exchange Management Act 1999.
 Section 2(i), Foreign Exchange Management Act 1999.
Shankara Rao Badam & Ors. v. State of Mysore & Anr,  AIR SC 1416.
Tata Consultancy Services v State of Andhra Pradesh, 271 ITR 401 
 Section 2, The Sale of Goods Act 1930.
 Supra Note. 13.
 The Economic Times, Government Steps Up Vigil On Bitcoin Transactions, May 30, 2017. Available at <http://economictimes.indiatimes.com/news/economy/policy/government-steps-up-vigil-on-bitcoin-transactions/articleshow/58911702.cms>.
 Supra Note. 13.
 Anthony Volastro, CNBC Explains: How to Mine Bitcoins on your Own, January 23, 2014. Available at <http://www.cnbc.com/2014/01/23/cnbc-explains-how-to-mine-bitcoins-on-your- own.html>.
 Pawan K. Aggarwal, Incidence of Major Indirect Taxes in India, p. 14-16. Available at <http://www.nipfp.org.in/media/medialibrary/2014/10/INCIDENCE_OF_MAJOR_INDIRECT_TAXES_IN_INDIA.pdf>
 The Central Goods and Services Tax Act, 2017, § 9(1).
 Id. § 7(1)(a).
 Notification No. No. VAT-1505/CR-114/Taxation-.
 Vijaya Aluminium Industries v. State of Andhra Pradesh,  103 STC 508.
 Devi Das Gopal Krishna and Others v. State of Punjab,  20 STC 430 (SC).
 Provision of Services Rules, 2012
 Section 65B(44), Finance Act, 1994.
 Id. Section 65B(37).
 Section 2 (84), Central Goods and Services Tax Act, 2017; Section 2 (102), Central Goods and Services Tax Act, 2017.
 Id. Section 7(1)(a).
 EY-ASSOCHAM Knowledge Report, Evolving Landscape of Financial Institutions in India, July, 2016. Available at <http://www.ey.com/Publication/vwLUAssets/ey-evolving-landscape- of-micro nance-institutions-in-india/$FILE/ey-evolving-landscape-of-micro nance-institu- tions-in-india.pdf>.
 Brett Scott, How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance?, United Nations Research Institute for Social Development Working Paper Group, Paper No. 2016-1, 2016. Available at <http://www.unrisd. org/brett-scott>.
 Reserve Bank of India, Master Circular, Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under Prevention of Money Laundering Act, (PMLA), 2002, RBI/2014-15/70. Available at <https://www.rbi.org.in/scripts/bs_viewmascirculardetails>.