MARCH 26, 2018

By Mahwash Fatima

BITCOIN caught the global attention yet again after the meteoric surge in its value worldwide. Unlike fiat currencies, Bitcoin works completely on a decentralised network solely governed by its users without any intermediaries and offers an alternative digital monetary system. However, this decentralised nature makes this cryptocurrency the centre of numerous legal and regulatory issues. Unlike most countries, Bitcoin is not recognised as a currency in India but the transactions or trading in Bitcoins are not prohibited either. From a legal standpoint, this results in various regulatory issues the major one being taxation. Since bitcoin is not classified either as money or goods in India, it is practically impossible to levy taxes be it direct or indirect.

Possible Classifications Of Bitcoin In India

The tax implication of bitcoin transactions hinges upon its classification and the determination as to whether they are goods or currency. Therefore, it becomes absolutely necessary to classify bitcoin under a particular category to ensure regulated tax levy. Some of the possible classifications of Bitcoin is enlisted below:

++ Currency:

In India, currency and money have been defined under Section 2(h) of Foreign Exchange Management Act, 1999 and Section 2(75) of the Central Goods and Service Tax Act, 2017 (CGST Act) respectively. Both these definitions include only those instruments within their ambit which have been recognised by RBI.

Since RBI has not notified Bitcoin to be a currency, it cannot be classified as a currency as understood in the sense of a legal tender in India. However, keeping in mind the technological advances,countries like Japan have recognised Bitcoin to be a virtual or digital currency.

Virtual currencies are a type of digital currency without a physical counterpart with legal tender status. European Central Bank (ECB) in its 2012 report on virtual currencies, defined the same as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.” Therefore, in the very least, Bitcoin can be classified as a virtual currency.

Regardless of its form, money is traditionally conceived to fulfil three functions namely medium of exchange, unit of account and store of value. Since Bitcoin majorly fulfils all three functions except probably being a store of value owing to its highly volatile nature, it is prudent to recognise Bitcoins as a virtual currency if not a currency in the traditional forms enlisted in the definition give under FEMA.

++ Goods:

The term ‘goods' as defined under Section 2(7) of the SOGA and Section 2 (52) of the CGST Act includes within its ambit “ every kind of movable property” . Since Bitcoin is moveable within the vast expanse of cyberspace and does not get covered in the specific exclusions enlisted in the said definition of ‘goods', it can very well be classified as ‘goods'.

TAX IMPLICATIONS OF BITCOIN IN INDIA

In the present day, indirect tax implications of Bitcoin will be studied under the GST regime and as per the provisions of the CGST Act. Bitcoin will be subjected to GST when it is either classifiable as goods or when transactions relating to bitcoin are classifiable as a service.

The levy of GST is governed by Section 9 of the CGST Act which seeks to levy GST on intra-state supply of goods or services or both. Further, Section 7 of the Act elucidates what is supply of goods and supply of services. It is pertinent to note that Bitcoin will be subjected to GST under both circumstances, i.e., under both its classifications as goods or as money. The only difference is that when Bitcoin is classified as a commodity then Bitcoin itself will be subjected to GST and when it is classified as money then the transactions related to Bitcoin will be subjected to GST.

++ When Bitcoin is goods

A perusal of the scope of ‘supply' as provided under Section 7 of the Act read with definition of ‘goods' will make it clear that bitcoin transactions in all forms, be it sale, barter, transfer, exchange, etc., made for a consideration and in the course or furtherance of business will qualify to be a supply.

Supply of goods: As elucidated in the preceding paragraphs, Bitcoin can easily be classified as ‘goods'. The moment bitcoin is classified as good, transactions in bitcoin become a ‘supply' as envisaged under the CGST Act where the consideration is the currency in exchange of which bitcoin is transferred or traded. Transactions where goods are bought via bitcoin are barter transactions because in effect goods are being exchanged for goods thereby qualifying as a supply under Section 7 of the CGST Act.

++ When Bitcoin is a currency

The definition of ‘goods' under Section 2(52) of the CGST Act excludes ‘money' from its ambit. However, services related to money being a ‘service' are taxable as a separate taxable activity thereby qualifying to be a supply of service.

Supply of service: It is pertinent to note that if Bitcoin is classified as money then activities relating to bitcoin or its conversion from one form to another will be a ‘service' as defined under Section 2(102) of the CGST Act and therefore such activities relating to bitcoin would be subjected to GST. In such a scenario, bitcoin exchanges like Zebpay, Unocoin, CoinSecure, BtcxIndia, etc., would become service providers and will be liable to discharge GST.

Therefore, unlike the common understanding that GST will be leviable only when Bitcoin is classified as a goods, it is evident that GST will also be levied in cases where Bitcoin happens to be classified as money. The only point of consideration is that the definition of ‘supply' under Section 7 includes only those transactions which are done in the course or furtherance of business. Business has also been defined under the Act and a perusal of the same leaves us with a food for thought as to what are the tax implications on bitcoin transactions which are executed on an individual level outside the purview of ‘business'.

Furthermore, it is also pertinent to note that as per news reports various bitcoin exchanges in India are planning to approach the Authority of Advance Ruling to get clarity on the GST implications on bitcoin. All eyes are now on this advance ruling to determine the indirect tax liability on bitcoin.

CONCLUSION:

Presently, the tax implications on Bitcoin, if any, are not clear. While on one hand the Bitcoin exchanges are approaching the Advance Ruling Authority under GST to get clarity on indirect tax liability, the income tax department on the other hand has attempted to tax capital gains arising out of Bitcoin transactions by issuing notice to investors. It will therefore be interesting to see how the tax authorities peg the direct and/or indirect tax liability in absence of a concrete classification of this cryptocurrency. Maybe India can follow Australia where the Australian Taxation Office, clarified that Bitcoin should be treated as ‘money' for the purposes of their GST Act and further clarified that GST will not be levied on Bitcoin purchases thereby reversing the 2014 ruling which had held Bitcoin to be a commodity. Therefore, if not for a water tight compartmentalisation of Bitcoin, the tax authorities should atleast give a clear ruling on the tax liability to avoid hawala transactions and hoarding of black money.

(The author is Associate, Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)