GST on Cryptocurrency

[Aporna Dasgupta]

Cryptocurrency has existed in the market for almost two decades now. However, people at large do not have a clear picture of what cryptocurrency is let alone taxing it.

The word cryptocurrency can be divided into 2 parts- Crypto & Currency. Crypto quiet literally means something that is concealed and currency is just a system of money used in a particular country. When added, the term cryptocurrency translates to currency in concealed files, to be specific it is digital money.  These currencies use peer-to-peer network which operates without the need for a third-party intermediary such as a regulator/ administrator. One can spend legal tender and buy cryptocurrency or mine them, this process is known an cryptomining. Cryptomining could be understood as winning a reward for completing a task which involves validating data blocks and adding transaction records to a public record (ledger) known as a blockchain.

There are various currencies in the market of cryptocurrency such as Bitcon (the most popular), Ethereum, Ripple and Mon-roe etc. These currencies are used world over and they do not have any Central Bank or authority governing them. In April 2018, the Reserve Bank of India banned the banks from dealing with organizations that are related to cryptocurrencies. The government too has issued periodic warnings about the perils of doing business on digital currencies. However, the whole thing has remined in the grey area as its not clear if the transactions are legal or illegal. Whether legal or not, it has been established that cryptocurrency is a form of currency alias money.

Recently, The Central Economic Intelligence Bureau (CEIB), proposed to impose 18% GST on Bitcoin transactions. The CEIB told CBIC that Government could potentially gain ₹ 7,200 crores annually on bitcoin trading. CEIB has also suggested that Bitcoin be categorized as an 'intangible assets' by which GST could be imposed on all the transactions. It was also added that cryptocurrency could be treated as currents assets and GST be charged on the margins made when traded.

The CBIC is still reflecting upon a proposal that is yet to be put forth the GST Council. The key points of the proposal are as follows-

1. Cryptocurrency `mining’ will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees. Tax will be collected from the miner on transaction fees or reward. If the value of the reward exceeds ₹ 20 lakh, individual miners will need to register themselves under the Goods and Services Tax (GST).
2. The proposal also considers `wallets’ storing keys taxable. Wallet service providers should be registered under GST.
3. Cryptocurrency exchanges need to register and pay tax on their earning.
4. Trading may attract 18 percent GST.
5. 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.
6. The transaction value in rupees or the equivalent of any freely convertible foreign currency will be used to determine the value of cryptocurrency.
7. In a scenario where both buyer and seller are in India, a transaction would be treated, as a supply of software and the buyer’s location will be the place of supply.
8. For transfer and sale, the location of the registered person will be the place of supply. However, in a scenario where sale has to be made to non-registered persons, the location of the supplier would be considered as the place of supply.
9. Integrated GST would be applicable for transactions conducted beyond the Indian territory and would be considered as import or export of goods. IGST will be levied on cross-border supplies.

The potential benefit to the Government is mammoth but the question that arises here is-

Can GST be applied on Bitcon?

GST as the name suggests is a tax that is applicable when there is a supply of goods or services. Unless, Bitcoin is classified as goods/services GST on the same would not be applicable.

The term “Goods” as per section 2(52) of CGST Act, 2017 is- every kind of movable property other than money and securities but includes actionable claims, 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.

Money has been defined under section 2(75) of the Act as- Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, travellers cheque, money order, postal or electronic remittance or 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 but shall not include any currency that is held for its numismatic value.

Section 22 of the RBI Act states that RBI alone has the right to issue bank notes and under section 26 of RBI Act states that bank notes shall be legal tender in India. From the above it appears that Bitcoin maybe akin to a currency or legal tender, it however is not bank notes and is consequently not legal tender in India.

As discussed above, the RBI has not granted any regulatory approval to bitcoin so can it be concluded that Bitcoin is not money for purposes of taxation under GST?

Can Bitcoin be termed as sercurities?

Section 2(75) of the Act states that the meaning is as defined under sub-section h of section 2 of the Securities Contracts (Regulation) Act, 1956, which is-

1. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate
2. derivative
3. units or any other instrument issued by any collective investment scheme to the investors in such schemes
4. Security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
5. units or any other such instrument issued to the investors under any mutual fund scheme
6. Government securities;
7. such other instruments as may be declared by the Central Government to be securities; and
8. rights or interest in securities

With the little familiarity and understanding that we have gained about cryptocurrency, we can tell that it does not satisfy the definition of Securities.

Hence, the question persists- whether GST would be applicable on Bitcoin and is Bitcoin taxable as services?

Section 2(102) states- Service means anything other than goods, money and 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.

From the above discussion we can decipher that if anything, cryptocurrencies are cognate to goods than they are to services. Hence, GST could apply on Bitcoins.

However, there exists a contrary view based on the premise that Bitcoins are a form of currency and can not be termed as goods. In the Foreign Exchange Management (FEMA) Act, 1999 under section 2(h), it has been defined that currency involves 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 notified by the RBI.

So, does cryptocurrency fall under the ambit of currency within the given definition?

Although the RBI has not notified Bitcoin as legal tender, one cannot dismiss the fact that Bitcoin is an accepted mode of payment in the country. Hence, in principle, the RBI should recognize it as currency, and not as goods.

Due to the absence of clarity, one needs to begin preparation for the upcoming changes.

Moving onto the second part of the discussion-

Would Cryptomining qualify as a service?

CGST Act, 2017 does not define the term ‘service’ as extensively as it was discussed in the erstwhile law, however the old definition does find recognition even to the present date to understand certain peculiar cases. So, to elucidate- ‘service’ meant any activity carried out by a person for someone else for consideration. This goes to mean that in order for a transaction to be a service the following points are to be met:

1. There must be a supply of taxable services
2. Which is used in furtherance of a business
3. for a consideration (there must be an outlined contractual relationship where there exists direct nexus between the consideration and the service being provided)
4. benefit of service to be provided by the service provider to the service recipient

In case of cryptomining, one can say that there is a provision of service since the miner (service provider) is supplying computing service to the users of bitcoin system (service recipient) for a consideration i.e., Bitcoins. But the whole network of blockchain is structured in such a way that there is no one identifiable recipient of service. But going through the definition of a person as provided under section 2(84) states-

“person” includes-

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;

(h) any body corporate incorporated by or under the laws of a country outside India;

(i) a co-operative society registered under any law relating to co-operative societies;

(j) a local authority;

(k) Central Government or a State Government;

(l) society as defined under the Societies Registration Act, 1860;

(m) trust; and

(n) every artificial juridical person, not falling within any of the above;

the recipient in the present case would be covered under the ‘body of individuals’ and the value so generated would be considered to be inclusive of GST.

Another point of concern in case of cryptomining would be that not all the miners at all times are rewarded for their services, meaning that in most of the cases, the miners do not earn any consideration at all. Since the definition of supply as per section 7 of the Act states that consideration is an indispensable condition to state a transaction to be a supply, the activity performed without consideration is outside the ambit of ‘supply’ under GST.

Hence, to conclude there is a good chance that GST would become applicable on cryptocurrency and perhaps also on the mining services. But no stated rules and regulations with regard to cryptocurrency and the precipitous speed at which the blockchain technology is growing, it is high time taxation and regulatory principles are brought in to stabilize the current situation and clear off all the grey areas.