INTRODUCTION
Cryptocurrency can be understood as a digital or virtual form of currency which is secured by cryptography, making it extremely difficult to counterfeit. Several Cryptocurrencies are based on blockchain technology as decentralized networks.
Cryptocurrencies comprise of complicated systems which allow for safe transactions online, denominated as virtual tokens represented by internal ledger entries on a system. The term “Crypto” represents several encryption algorithms and cryptographic methods that secure entries, as the likes of public-private key pairs, elliptical curve encryption and hashing functions.
Cryptocurrencies, spotlighted as the subject of the decade, have drawn significant attention of taxation authorities, primarily because of the high value at which they were being exchanged across India and abroad.
Given the fact that several countries across the globe have recognised Cryptocurrencies as a legal currency, it is inevitable that the same attracts taxation consequences too. In the United States, Cryptocurrencies are recognized as ‘property’ for the purpose of taxation by the Internal Revenue Services. Whereas in Canada and Australia, Cryptocurrencies are treated as ‘asset’ for capital gains tax purpose.
On the other hand, in the European Union, Bitcoins are exempt from Value-Added Tax (“VAT”) in all European Union (“EU”) member states; and in Finland, the Central Board of Taxes has granted Bitcoins VAT exemption to Cryptocurrencies by classifying them as a financial service.
In such circumstances, the dilemma is whether or not the said currency is taxable in India under Indirect Taxes such as Goods and Services Tax (“GST”). Herein below we have analysed the implications of Indirect Tax on Cryptocurrency in India.
CRYPTOCURRENCY: CURRENCY OR GOODS?
The validity of Cryptocurrency in terms of law is dicey due to the fact that it may neither be interpreted as ‘currency’ as defined under Section 2(h) of the Foreign Exchange Management Act, 1999 nor as a ‘coin’ as defined under the Coinage Act, 2011.
Cryptocurrency, being a form of movable property bearing similarities with shares or stock, may be considered as ‘goods’ under Section 2(7) of the Sale of Goods Act, 1930. Section 2(7) defines ‘goods’ 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.”
However, as cryptocurrencies do not have an “intrinsic value” or “speculative value” of their own, they do not completely fit into the definition of goods either. In other words, Cryptocurrencies do not have such a value which suffices as the reason people would buy it, if they do.
People usually purchase Cryptocurrency to trade and earn profits, and not for storing value in it. It is not that Cryptocurrency has a fundamental value, but the transactions in it, which help earn something. Therefore, it may be incorrect to categorise Cryptocurrency as ‘goods’.
INDIRECT TAX IMPLICATIONS ON CRYPTOCURRENCY
I. Constitutional Provisions
While Article 246 of the Constitution of India gives the authority to the Parliament of India as well as state legislatures to levy taxes, Article 265 of the Constitution of India states that tax cannot be imposed without any legal authority or grant of power by the mechanism of law.
However, the Constitution (One Hundred & First Amendment) Act, 2016 introduced certain amendments and by adding Article 246A to the Constitution of India which pertains to the imposition of GST, gave authority to the Parliament and the Legislature of each state to make laws concerning GST to be imposed by the Union or the State; and the exclusive authority to the Parliament to make laws regarding GST to be imposed on inter-state commerce and trade.
II. Central Goods and Services Tax Act, 2017 (“CGST Act”)
GST is applicable on services provided by the Cryptocurrency exchanges, as any service provided by a supplier, which specifically does not attract any special rate of GST, is charged to tax at the rate of 18% as per Entry no. 453 of Schedule III of Notification No. 1/2017 – CT (Rate) dated 28.06.2017.
Cryptocurrency Mining: The question of applicability of GST lies in case of mining of Cryptocurrencies. One argument could be to treat mining as ‘service’, as mining can be treated as service provided by a person for generation of currency. However, once the Cryptocurrency is introduced in the market, such Cryptocurrency may be treated as ‘goods’. Therefore, it is unclear when exactly should GST be levied on such transactions.
In case of Bitcoin ‘mining’, the individuals process the transactions and secure the network by using specialized hardware, in exchange for which they are awarded new Bitcoins. Mining is clearly a service provided by the miner. However, for a service to be taxed under GST, there must be a contractual link between provision of service and consideration against the same, as provided under Section 7(1)(a) of the CGST Act which considers a transaction of service as supply only if it is for a consideration in the course or furtherance of business.
However, from the above reference there is no such contractual link between miners and the algorithm which issues new Bitcoins. In view of no direct link between provision of mining service and the consideration in the form of Bitcoins, the same may not be taxed under GST. However, Bitcoin may also be seen as a consideration awarded to the individuals in lieu of their services to secure the Bitcoin Network. Therefore, the Bitcoin ‘miners’ may be required to pay GST on the fair market value of Bitcoin at the rate of 18%.
Presently, no Harmonised System of Nomenclature (“HSN”) classification has been accorded to Cryptocurrency by way of any Notification issued by the Central Board of Indirect Taxes and Customs (“CBIC”). In case if GST is leviable to the said transaction, then the subsequent question that arises is whether the same should be classifiable as goods or services.
The applicability of GST on Cryptocurrencies will essentially be subject to its nature – i.e., what is Cryptocurrency treated as – a computer programme, a Property, Goods, or Money. While money is kept outside the purview of GST, if treated as computer programmes, GST shall be applicable on it at the rate of 18%.
However, another school of thought is that the same should be classified as goods, going by the Frequently Asked Questions on Information Technology or Information Technology Enabled Service (“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 taxability of Cryptocurrency, few Indian investors and companies are planning to approach the Advance Authority of Ruling (“AAR”) to provide clarity on the queries.
Accordingly, considering the present situation at hand, the same is classifiable as ‘goods’ only, on which GST is under Entry 453, Schedule III of Notification No. 1/2017 – CT (Rate) dated 28.06.2017 in view of the following:
- Cryptocurrency is not ‘money’ – As Cryptocurrency is a decentralised currency, the same is not recognised by Reserve Bank of India (“RBI”). Hence, it may not be treated as money and should be covered under the definition of goods or services. Moreover, the RBI has not granted any regulatory approval to Cryptocurrency till date.
- Cryptocurrency is not bank notes or legal tender – Section 22 of the Reserve Bank of India Act, 1934 (“RBI Act”) entrusts upon the RBI alone the right to issue bank notes, and Section 26 of the RBI Act states that bank notes shall be the only legal tender in India. Hence, it can be inferred that Cryptocurrency, although akin to a currency or legal tender, is not bank notes and is consequently not legal tender in India.
- Cryptocurrency is not a ‘security’ – Cryptocurrency is not covered under the definition of Securities under the Section 2(101) of the CGST Act and under Section 2(h) of the Securities Contracts (Regulation) Act, 1956.
- Cryptocurrency is not an actionable claim under Section 2(1) of the CGST Act – Cryptocurrency does not signify a claim to unsecured debt, as defined under Section 3 of the Transfer of Property Act, 1882. This is because there is no person who is an issuer who guarantees repayment of a fixed value assigned to such Cryptocurrency. Further, they create no interest in a movable property which is not in possession of the lender.
- Cryptocurrency is an intangible asset, like Intellectual Property Rights (“IPR”), though not recognised under Indian laws – Transfer of IPRs are chargeable to Service Tax, excluding IPRs like integrated circuits or undisclosed information (not covered by Indian law) which are not covered under taxable services. However, in the case of Cryptocurrency, it is an intangible asset although not classifiable as IPR as it is not recognised by any law in India.
However, if the same are to be treated as ‘services’, then in the absence of clarification by Central Government, the same can be classifiable under the Heading 9997 ‘Other Services’, taxable at the rate of 18% as per Notification No. 11/2017-CT(Rate) dated 28.06.2017.
Section 2(102) of the CGST Act defines ‘services’ as:
“anything other than goods, money or 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 term service as defined above is very broad and covers all services including information technology/software service.
The term ‘information technology software’ has been defined in Explanation (v), Clause 4 of Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017 as:
“any representation of instructions, data, sound or image, including source code and object code, recorded in machine readable form and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.”
Cryptocurrency may fall under this definition of information technology/software, and thus, may be subject to GST on such services at the rate of 18%.
III. The Customs Act, 1962
The applicability of customs duty on Cryptocurrencies may also arise in case of import of cryptocurrencies into India, under Section 12 of the Customs Act, 1962 (“the Customs Act”). Section 2(23) of the Customs Act defines ‘import’ as:
“bringing into India from a place outside India”.
Hence, where the Cryptocurrency transaction takes place between a seller outside India and a buyer within India, it may attract customs duty.
However, in the case of import of software, customs duty is to be levied subject to the condition that the software is imported in a physical form, as held by the Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401. Therefore, software which is imported online is not chargeable to customs duty. Similarly, if cryptocurrency is treated as software, no customs duty shall be applicable on its import.
WAY FORWARD
Although the potential benefit of taxation of Cryptocurrencies will provide an exponential rise in revenue, certain issues need to be addressed moving forward including:
I. Firstly, the treatment of Cryptocurrency as good or services. It is important to note that RBI has not notified any virtual currency as recognized currency till date. However, if any Cryptocurrency were to be recognized as a currency, it gets immediately out of the purview of GST since ‘goods’ do not include currency. Having said that, GST should be applicable to the trading of Cryptocurrencies as the definition of goods is wide enough to cover such intangible goods.However, it is to note that if Cryptocurrency is sold for cash, there would be a single supply that should be subject to GST. But where Cryptocurrency is traded for another good, it is a barter transaction with two simultaneous supplies; therefore, GST would be payable twice, resulting in a substantial GST impact.
II. Secondly, the valuation of such transactions is another point of probable contention. As Cryptocurrencies are traded around the world at different rates and even intraday prices at times vary considerably, it is possible that this could also potentially lead to litigation.
Issues may further arise in respect of exchanges as to the value on which GST is payable. Ideally, the tax should be payable only on the service fee component charged; however, it may be another point of disagreement.
III. Thirdly, the place of supply of trading in virtual currency is another grey area since there are difficulties in determining whether it will be an inter-State or intra-State supply of Cryptocurrencies. Further, the taxation and registration implications would differ significantly based on the location of the supply.
AMLEGALS REMARKS
Cryptocurrency in India may attract indirect tax liability, but the position of law is still unclear as the RBI has not yet granted this asset class the status of a legal tender. Until it is declared as a legal tender, Cryptocurrency and its trading is a grey area for the law enforcement agencies of any country for the indirect and direct taxation of Cryptocurrencies. Though Cryptocurrency is not a legal tender in India, many people have started investing in it.
The Supreme Court of India permitted banks to handle Cryptocurrency transactions from traders and exchanges in March 2020 vide judgment in the case of Internet and Mobile Association of India v. Reserve Bank of India (Writ Petition (Civil) No. 528 of 2018). However, in June 2021, the Enforcement Directorate raised doubts over the continued trade of Cryptocurrency in India. Thus, the Government should expedite the process of introducing the proposed Cryptocurrency Bill, 2021 which clarifies major grey areas like classification of Cryptocurrencies as goods or services, taxability or exemption of Cryptocurrencies, etc.
There is no doubt that blockchain technology has enormous potential; thus, out rightly banning Cryptocurrencies is not the solution despite the complexities involved. An ideal solution for the Government to tackle this situation would be to legalize the trading of these virtual currencies and charge GST on margins that Cryptocurrency exchanges charge their users, thus safeguarding the trading of Cryptocurrencies in India along with enhanced tax revenues for the India Government.
-Team AMLEGALS assisted by Ms. Palak Rawat (Intern)
For any query or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or riddhi.dutta@amlegals.com.
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