GST on Cryptocurrencies

“Bitcoin is neither fish nor fowl…But both pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seem problematic. The problem is not that it is not issued by the Government nor that it is unregulated. The problem is that it is hard to see what it is.”

- George Friedman, the founder and Chairman of Geopolitical Futures LLC

Internet is filled with articles and videos on – What is Cryptocurrency, How to create your own Cryptocurrency etc. This article does not attempt to explain what Cryptocurrency is. The intention of this paper is to understand the transactions in Cryptocurrency from a GST perspective. Infact, this paper attempts to raise questions rather than answer them.

A. Is Cryptocurrency legal in India?

As on date, dealing in Cryptocurrency (also referred to as “Virtual Currency” or “VC”) is not illegal in India. However, it would be important to understand some background around the legality or otherwise of VC in India

1. The Finance Minister on February 1, 2018 in his Budget Speech for the FY 2018-19[1] mentioned that “the Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system”;

2. RBI had issued an instruction on April 6, 2018[2] to prohibit Banks and other financial institutions from dealing in Virtual Currency or facilitating any person / entity dealing in Virtual Currency;

3. Three Bills introduced to Ban / Regulate Crypto Currency

a. Crypto Token and Crypto Asset (Banning, Control and Regulation) Bill, 2018

b. Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019[3] - Proposed imprisonment of upto 10 years and penalty upto Rs 50 Crores

c. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021[4] - The text of the bill is not available in the Public Domain

All the three bills provide for banning all transactions related to Private Crypto Currency (including issuance, mining, trading, wallet, exchanges etc) and also hints at creation of Official Digital Currency to be issued by RBI – The entire concept behind Crypto Currency is that it is de-centralized. If the RBI issues a digital currency, it will again be a centralized system and hence may not quality as a Crypto Currency in true sense.

4. The Supreme Court in a Writ Petition filed by Internet and Mobile Association of India, held that the Circular issued by RBI dated April 8, 2016 (referred at Sl No. 2 above) is to be set aside – Placing reliable on the said judgement it can be said that currently VC is not illegal in India.

B. What is Cryptocurrency? – Comparison

IS IT	Yes	No
​Money?	It can be used to buy or sell products	​Unlike VC, RBI / Central Bank promises to pay the holder, the face value of the currency
Gold?	Price is based on Demand and Supply Both are mined – Gold from the crust of the earth and VC by validating the transfers	​Gold has an end use – Can you used as a jewellery but that is not the case with VC
​Shares?	Traded in an Exchange	Shares – Value is based on the profit estimates of the Company as well as the assets held by them. As of today, VC derives its value only based on an anticipation that it will replace traditional currency
​Reward Points?	Created and issued by the Issuing Company	Use of reward points is restricted to the terms and conditions of the issuer and they come with an expiry date. This is not the same in case of VC

C. What is Cryptocurrency? – specific reference to GST Laws

VC can be exchanged for purchase and sale of goods / services and to that extent it displays the characteristic of Money / Currency. However, in many ways, it appears to be a digital asset. Let us examine from the perspective of GST whether VC will qualify to be money or security

Money?

1. Section 2(75) of the CGST Act, 2017 defines the term money to mean

a. Indian legal tender;

b. Any foreign currency;

c. cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance; or

d. any other instrument recognized by the Reserve Bank of India when used as consideration to settle an obligation or exchange with Indian legal tender of another denomination.

2. VC cannot be said to be Indian Legal Tender, Cheque or any other instrument referred above (except “foreign currency” which needs examination). Let us examine the meaning of “foreign currency”;

3. Section 2(m) of the Foreign Exchange Management Act, 1999 defines the term foreign currency to mean “any currency other than Indian currency” and the term currency has been defined as “Currency Notes, Postal Notes ….. or such other similar instruments, as may be notified by the Reserve Bank”. Since, VC have not been notified by the Reserve Bank, they are not currencies and in turn cannot be treated as foreign currency and hence cannot be treated as money for the purpose of GST;

4. It would be worthwhile to mention that few Countries including India plans to introduce their own Digital Currencies – As mentioned above, it is not sure if these digital currencies issued by the Reserve Bank or equivalent in other Countries can be considered as VC. However, these Digital Currencies are expected to receive the recognition of RBI and hence will be treated as money (as provided in the 2019 Bill relating to regulation of VC);

Security?

1. The term Security has been defined by referring to Section 2(h) of the Securities Contracts (Regulation) Act, 1956. Without re-producing the definition, breaking it down and then analysing if VC falls under any of the categories of securities or not, it would suffice to mention that Securities are issued based on underlying assets and that in case of VC there are no underlying assets;

2. Infact the regulators world over are sceptical about VC since it does not have any underlying asset and its value is determined based on demand and supply. One may argue that value of Gold is also dependent upon the Demand and Supply. But Gold has utility value of its own – Can be used as a jewellery. Such utility is missing in case of VC (except for Crypto utility tokens);

3. Apparently, when the Draft Bill of 2018 was sent to SEBI, the bill was returned back with comments that SEBI is not best suited to be regulator of Crypto Assets or Tokens. Thus, even the regulator believes that VC is not a security and hence he is not suited to regulate or comment on the Draft Bill relating to VC;

Goods?

1. The Hon’ble Supreme Court in the writ petition filed by Internet and Mobile Association of India (referred above) in certain portions of the judgement referred to VC as Money and in certain other portions referred to it as Goods. There is however no conclusive answer which has been provided in the said Judgement as to whether VC should be treated as goods or as money;

2. CGST Act, 2017 defines the term Goods to mean “every kind of movable property ….”. When something is tangible, it is goods but whether movable property being intangible can also be treated as goods? The Hon’ble Supreme Court while deciding on the question of whether Software is goods or not, in their celebrated judgement in the case of Tata Consulting Services held that Goods in Indian context includes even intangibles so long as they are capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc;

3. Reference can also be made to various decisions rendered in the context of Income Tax wherein it has been held that Goodwill is not an intellectual property but an intangible asset VC are certainly not tangible property but has almost all the attributes identified by the Apex Court in the context of Software and can accordingly be treated as Goods;

D. Taxability of VC

1. GST Laws provide for levy of GST on supply of goods or services. Based on our discussions, VC can be considered as goods and hence purchase or sale of VC will be liable to GST. The rate of tax on any product in GST is determined based on the tariff classification;

2. VC do not find any mention in the Tariff and hence currently does not have any notified tax rate for discharging taxes. It may not be correct to state that since there is no GST rate notified on VC and hence the median rate of 18% will apply under residual category since residual category also provides for rate of 18% for goods which are covered under “any chapter” but for which no specific rate has been notified and the issue with respect to VC is that it is not covered under any Chapter of the Tariff;

E. Is sale of VC liable to GST?

1. Setting aside the issue of VC not finding a mention in the Tariff, if we proceed with the conclusion drawn in the above discussion then purchase and sale of VC is liable to GST. Now let us consider an example - A salaried employee downloads an App on his mobile phone and executes a single transaction of purchase of a VC for Rs 10 Lakhs and Elon Musk tweets about the same VC hours after his purchase which leads to the value of that VC increase by 200%. Happy with the money he is making, the salaried employee sells his VC for Rs 30 Lakhs. A question that arises here – whether the said employee is liable to GST on such sale of goods, being VC, of Rs 30 Lakhs? Would our answer be any different if the salaried employee would have sold his expensive car for Rs 30 Lakhs?

2. GST is levied on supply of goods for consideration in the course or furtherance of business. A one off sale of VC / Car by a salaried employee will not qualify to be transaction in the course or furtherance of business since he does not have any business. Accordingly, in both the situations referred above, the salaried employee would not be liable to GST on such supplies;

3. Reference can be made to the Press Release issued on July 13, 2017[5] wherein it was clarified that supply of goods in the course of business is liable to tax and sale of old gold jewellery by an individual to a jeweller is not the business of individual and hence not taxable;

4. If however the salaried employee is regularly dealing in VC then the same could be treated as business and in such a situation sale of VC by such person will be liable to tax. Now what qualifies to be “regular” will have to be examined on a case to case by taking into account the frequency of transactions, treatment in Income Tax – profits offered to tax as Business Income or Capital Gains or Other Income, intention of purchase – long term purchase for the purpose of investment etc;

F. Tax implications on other transactions relating to VC

1. Before we discuss about taxability of VC, we should take into account the fact that in case of purchase / sale of VC, the seller does not know the location and identity of the purchaser and hence it is impossible to determine whether the transaction is an inter-state supply, intra-state supply, export or import. This could be one of the grounds to challenge the levy of GST on VC;

2. Additionally, tax implications on VC would depend on whether the VC is issued by an

· Indian Company – treated as domestic purchase or sale; or

· By an Overseas Entity – could be treated as export or import or otherwise.

3. There are multiple permutation and combination which needs to be taken into account for examining the tax implications like VC issued by an overseas entity, purchase by an Indian person and sold to a person outside India or to a person in India. Or VC issued by an Indian entity, purchased by an overseas entity and sold to an Indian entity etc;

4. We have restricted our discussion to tax implications when the VC is issued by the Overseas Company to an Indian Investor. The principles applied in this situation can be applied to various other situations to arrive at the tax implications in those situations as well.

Please note that to understand the type of transaction, some background about VC Industry will be required.

Transaction type	What it means?	Tax Treatment
Issuance of Initial Coin Offering	ICO is similar to IPO. In case of ICO, VC are offered at discounted rates to early investors who have confidence in the concept of VC offered by the new Company.	The GST implication on this transaction is not clear – Can it be treated as supply of goods in the hands of the issuing Company? – VC are not in existence since coins being offered is in concept stage[1] Can it be treated as issue of securities? – There is no underlying asset and hence it cannot be treated as security [1] There have been multiple instances where the Company has collected money in the name of ICO and then the promoters of the Company have vanished with the investors money.
​Mining Fees	Unlike regular banking system where any transfer of money is recorded and verified by the Bank themselves, in a VC, transfer of VC are verified by Miners (external programmers). These miners gets a fee from the VC issuing Company for assisting in verifying the transaction	​VC issuing Company has received the services for which they are offering VC – This can be treated as barter of goods for services. However, since the issuing company outside India, no GST implication. For the Miner – It is a fee received by them in the form of VC for offering their services. This can be treated as export of service but the consideration is not received in convertible foreign exchange which could be an issue in claiming the transaction to be export of services A possible way out – Can it be treated as a barter transaction where amount due in convertible forex is being exchanged for VC?
Mining Fees – Pooling	Miners who are the first to verify the transfer are rewarded with mining fees. The speed at which miner can verify the transaction depends upon the processing speed of the system he is using. To ensure that the miner has the fastest processing speed, a group of miners work together to ensure that the combined processer strength is used to verify a transaction. The mining fee earned by the miners is shared in a pre-agreed manner (mostly based on the individual processing speed offered by each of the miners)	​Classic case of whether it is a joint venture where the main miner receives the money and shares the same with other miners (Revenue Share Agreement)? or is it the case of main miner rendering services to the issuing company and other miners providing services to the main miner for which they are compensated by way of issuance of VC? If the main miner is from India – Tax implications / complications referred above will apply to him and payment made by him to other miners in the group will be as under Other Miners located outside India – Import of service liable to tax under RCM Other Miners located in India – Such miners to charge GST on the fee share received by them
Purchase of VC	​An Indian investor can purchase VC through a Crypto Exchange	​Seller is located outside India - Import of goods is liable to Customs Duty but since the VC is being imported without crossing customs station, the same will not be liable to customs duty. Seller located in India – Since both the buyer and seller are from India, GST will be applicable. But as highlighted earlier, information of buyer and seller location is not available and hence determination of transaction type is not possible
Sale of VC	An Indian investor can sell VC through a Crypto Exchange	Buyer is located outside India – Export of goods require goods to be dispatched to a place outside India. This location is unascertainable in case of VC since these are stored on a server / cloud. Can the revenue authorities contend that since there is no evidence have been delivered outside India, the transaction will not be treated as exports? – Export of Goods under GST is different from Export under Customs. For the purpose of GST, intangible assets like Copyrights are goods and their permanent transfer to a person outside India will have to be treated as exports though these goods are physically not delivered outside India. Similarly, VC also being intangible, will have to be treated as export of goods though they do not get delivered physically to a location outside India. Seller located in India – Since both the buyer and seller are from India, GST will be applicable. But as highlighted earlier, information of buyer and seller location is not available and hence determination of transaction type is not possible
Crypto Exchange	Similar to a stock exchange. They assist the investors in buying / selling VC	The trading commission received by them is liable to GST
​Purchasing Goods or Services by paying supplier using VC		This could be treated as barter – Supplier has supplied goods / services which is liable to GST Customer has paid for the same by giving up VC which can be considered as sale of VC by customer to supplier
Block Chain	Block Chain is essentially a digital ledger which records transactions. It has multiple use cases one of it being recording transactions in VC	There is no supply here.

It can be observed that there are too many ifs and buts while dealing in VC right from the legality of the transaction to the classification in GST. VCs are here to stay unless of course all the Countries decide to ban the same. We will need to wait to see how the Central Government of India wants to deal with VC from the perspective of various Laws in India and in specific, from the perspective of FEMA, Income Tax and GST. We will also have to see how the VC ecosystem develops in the coming days.

Before parting, it would be interesting to note the observation of RBI in their Annual Returns for FY 2017-18 wherein it has been mentioned that “The cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy”.

That is what a disruptive technology is expected to do. Change the existing way of doing things.

[1] https://www.indiabudget.gov.in/budget2018-2019/ub2018-19/bs/bs.pdf [2]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.PDF [3]https://prsindia.org/files/bills_acts/bills_parliament/Draft%20Banning%20of%20Cryptocurrency%20&%20Regulation%20of%20Official%20Digital%20Currency%20Bill,%202019.pdf [4] Page 13 of http://loksabhadocs.nic.in/bull2mk/2021/29012021.pdf [5] https://www.cbic.gov.in/resources//htdocs-cbec/press-release/Press-Release-Reverse-Charge.pdf

[6] There have been multiple instances where the Company has collected money in the name of ICO and then the promoters of the Company have vanished with the investors money.