The term cryptocurrency is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain. Cryptocurrency generally operates independently of a central bank, central authority or government.
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.
Cryptocurrencies like bitcoin are decentralized, 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.
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 Nakamoto.
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”. However, no centralized authority, governmental or otherwise, controls the digital system.
GST
As the digital currency is widely used and traded all round the globe the consequences of taxation need to be recognized. To tax the Cryptocurrencies in India under GST there is need to determine the Cryptocurrencies and the transaction from GST perspective.
GST is the tax on supply of Goods and Services. Hence it becomes primary concern to determine whether these Digital Currencies are Goods or Services.
Services generally mean anything other than Goods. Thus, if the Cryptocurrency is not Good then it can be referred to as services.
Goods
Under sec 2(52) of CGST Act Goods means every kind of movable property
other than money and securities but includes actionable claim growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
Referring the above definition and considering the first thought Can the cryptocurrency be considered as money?
Currency is generally defined as tokens used as money in a country. In addition to metal coins and paper bank notes, money orders, traveler’s checks, it also includes electronic money or digital cash.
To fit in this definition, which is not exhaustive,
· Either bitcoin has to be physical and movable, and fungible. It is movable and fungible but not physical.
· Electronic money or digital cash may include bitcoin but then it needs a legal backing from an authorized entity, which is not the case in India as of now.
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” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers 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, as per Section 2(h) of Foreign Exchange Management Act, 1999
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.
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. Therefore, under the provisions of existing law, Bitcoin are not currency.
The system on which bitcoin works, is nothing but software, a set of codes which may be considered a ‘computer programme’. Indian Copyright Act, 1957 defines the word ‘computer programme’:
Section 2(ffc): "computer programme" means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.
Under GST, if classified as software/computer programme a rate of 18% shall apply.
Bitcoins are in nature of intangible assets and whether the same can be classified as a commodity is a matter of interpretation. However, the provisions of Sale of goods act, 1930 apply to Bitcoins since Bitcoins can be sold and bought.
Bitcoins are stored in E-Wallet and transferred from them to other E-Wallet. Since the Bitcoins can be stored and transferred, the Sale of goods act applies to them.
Anything to which Sale of goods act, 1930 applied is classified as "Goods" under the said act. Further, if Bitcoins and other Cryptocurrencies are goods, they will be liable to tax.
In Tata Consultancy Services v/s State of Andhra Pradesh (AIR 2005 SC 371 ) the Honourable Supreme Court classified computer software as goods. It opined that whether or not the software was put on diskettes, floppy disc, etc. which is either tangible or intangible as a commodity which can be stored and transferred and thus liable to sales tax. Bitcoins and similar Cryptocurrencies being intangible is covered under the definition of goods as per the above order of Honourable Supreme Court of India and thus liable to tax.
Supply
The section 7 of CGST act States the scope of supply for Goods and Services to be taxed under GST.
Section 7(1)(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
Above section clears that the supply of Goods includes Transfer, Barter and Exchange. Does the use of bitcoin amount to any of above?
Barter
The term ‘barter’ is defined in various dictionaries as follows: _
· The exchange of goods and productive services for other goods and productive services, without the use of money [The Black’s Law Dictionary]
· To exchange one commodity for another. Barter, exchange of wared for wares. Also, the thing given in exchange [The Law Lexicon]
This can be explained by an example. Say, X Accountant agrees to write the accounts of Hotel Y. It is agreed between X & Y that Y will provide free food to X as consideration for writing of accounts. Thus, X is providing service of writing accounts and Y is providing services of supply of food to X. In barter two-way supply takes place. X is making taxable supply of service of an account writing and Y is making taxable supply of food to X. Tax is payable by both.
In case of barter, the consideration is not in monetary form but it is in a non-monetary form. The consideration itself is separate supply. In these kinds of transaction, there are two-way supply. Therefore, each party to the transaction must pay GST on supply it makes. Each party will be entitled input tax credit provided the input has been used in the course or furtherance of business.
Exchange
The term ‘exchange’ is defined in various dictionaries as follows:
· When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing nor both things being money only, the transaction is called an exchange [The Law Lexicon]
· To barter, to swap to part with, give or transfer for an equivalent [The Black’s Law Dictionary]
This can be explained by an example. Car dealers agrees to pay certain amount for receiving old car when the person buys new car. The old car is exchanged with the new car and the consideration for the old car is reduced from the sale price of new car. Say, X car dealer advertises that person buying new car, if surrenders his old car, the appropriate value of old car will be deducted from the price of new car. The price of new car is Rs. 7 lakhs and X who intends to buy new car provides old car to dealer say Y. The dealer agrees to reduce Rs. 50,000 on surrendering of old car. Under GST, it will be treated as X has made supply of old car to dealer Y and Y has made supply of new car to X. If X is registered person, he will be liable to pay GST on Rs. 50,000 and Y will be liable to pay GST on Rs. 7 lakhs whether Y is registered or not.
Barter can be defined as the direct exchange of goods or services for other goods or services without the exchange of money. Also, a supply of digital currency in exchange for goods or services can be treated as a barter transaction. Thus, where the bitcoins which are termed to be Goods are exchanged for any other goods or services, it tantamount to barter. Further as supply includes barter the same is taxable under GST
Crypto assets work exclusively on the internet by using a network of computers that lend their processing power to verify and register all the transactions made. In return for their work, computers are rewarded with a payment in the form of tokens. The system that allows for this to happen is known as the blockchain, and it is the fundamental force behind any crypto asset. The blockchain is formed by blocks and each block is a segment of the chain that holds the Ledger of transactions made with crypto assets.
To conclude transaction in its earliest form began with the barter system and now with crypto assets, we are going back to the same structure. Crypto assets are treated as a commodity today, just like gold.
Place of Supply
As Cryptocurrency can be treated as goods, the provisions of place of supply of goods can be considered to determine the place of supply:
Section 10(1)(a) of IGST Act specify the place of supply of goods other than import & export shall be as follows:
Where the supply involves the movement of goods, whether by the supplier or the recipient or by any other person place of supply will be the location of the goods at the time at which, the movement of goods terminates for delivery to the recipient.
Here in this definition movement of goods may include both physical or virtual movement of goods.
Section 11 of the IGST Act specify the place of supply of goods imported into or exported from India as follows:
(a) Imported into India shall be the location of the importer
(b) Exported from India shall be the location outside India.
GST on Mining of bitcoins
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 supply 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.
Tax on Mining Bitcoins have to be mined, which is recorded in the blockchain, a public ledger of all transactions. Mining will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees, according to people aware of the matter. Tax should be collected from the miner on transaction fees or reward, and if value of the reward exceeds Rs 20 lakh, individual miners will have to register under GST.
Wallets storing keys that help users send and receive virtual currencies should also be taxed under the GST, according to the proposal. Wallet service providers will also have to register under GST.
Cryptocurrency exchanges will have to register under GST and pay tax on the commission they earn, according to the proposal. For exchanges located outside India, service provided by them to Indians would be considered import of a service, and they will have to pay IGST.
Section 13 of IGST Act specify the place of supply of services in case of cross-border supplies as follows:
The place of supply will be the location of the recipient except the following situation
The place of supply will be the of the following services shall be the location where the services are actually performed,
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Services supplied for goods that are required to be made physically available from a remote location by way of electronic means will be the location where the services are actually performed, The location where the goods are situated.
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Services supplied to an individual and requiring the physical presence of the receiver will be the location where the services are actually performed.
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Immovable property-related services, including hotel accommodation will be the location at which the immovable property is located.
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Admission to or organization of an event will be the place where the event is actually held.
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If the said three services are supplied at more than one locations. i.e., (i) Goods & individual related (ii) Immovable property-related (iii) Event related
At more than one location, including a location in the taxable territory Its place of supply shall be the location in the taxable territory where the greatest proportion of the service is provided
- In more than one State, place of supply shall be each such State in proportion to the value of services provided in each State
Location of the recipient of service If not available in the ordinary course of business: The location of the supplier of service will be the place of supply.
Export and Import
The sub-sections (5) & (6) of section 2 of IGST Act defines ‘export of goods’ and ‘export of services’ respectively. The provisions are reproduced below:
(5) “export of goods” with its grammatical variations and cognate expressions, means taking out of India to a place outside India;
(6) “export of service” means supply of any service when—
(i) the supplier of service is located in India
(ii) the recipient of service is located outside India
(iii) the place of supply of service is outside India
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange, and
(v) the supplier of service and recipient of service are not merely establishments of a distinct person in accordance with explanation 1 of section 8
From the above definition can be analysed in the following manner:
If a person located in India has Cryptocurrency wants to sell to a person located outside India. In this scenario there is a virtual transfer will happen from India to another country which is located outside India. So, it may be treated as an Export from India.
Further, the paragraph 5(c) and paragraph 5(d) of Schedule II specifies following transaction as transaction in service.
“(c) Temporary transfer or permitting the use or enjoyment of any intellectual property right;
(d)Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software.”
In the case of data mining Mining will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees, according to people aware of the matter. Thus, these activities will be considered as services. There are many companies who export computer software regularly. If they are exported through internet it will be considered as services. However, if they are exported by incorporating software in any medium, they are considered as export of goods. But now because of provisions contained in paragraph 5(c) and 5(d) of Schedule II, these items of export will be considered as ‘export of service’ and not ‘export of goods’ under Goods and Services Tax Act.
The import of goods and import of services have been defined in section (10) and section 2(11) of the IGST Act respectively. These are reproduced below:
2(10) “import of goods” with its grammatical variations and cognate expressions, means bringing into India from a place outside India;
2(11) “import of service” means the supply of any service where—
(a) The supplier of service is located outside India,
(b) The recipient of service is located in India, and
The place of supply of service is in India.
