AUGUST 03, 2021

By Rishab J & Sriharsha Palanki*

1. Introduction

VIRTUAL currencies ('VC') are on the brink of earning recognition and the potential acquisition of a unique classification as a medium of exchange by the Government of India. As discussed earlier in Part–I of this article series, the nature of existence of VCs is quite attractive to enthusiasts and investors alike. This interest is further garnered by the fact that there is also a certain degree of anonymity linked to the transactions, which is suitable for certain category of investors.

It is currently speculated as to whether the Government of India would recognize Cryptocurrency as a medium of transaction or as a class of asset, which would empower the Government to join the bandwagon by imposing appropriate tax on the transactions of VCs. The potential levy of income tax has been discussed in Part-II of this article series and the potential levy of GST is discussed below.

1.1 Qualification of VCs and scope of supply

Nature of VCs

An understanding of nature of VC's would be quintessential to arrive at the potential implication of GST on the transaction. The definition of 'Goods' and 'Services' provided under Section 2(52) and 2(102) of the Central Goods and Service Tax Act, 2017 (CGST Act) read as under:

'Goods' is defined as every kind of movable property other than money and securities. In the present case, cryptocurrency does not have a physical and tangible existence and cannot be defined as movable property. Hence, it can be safely concluded that VC is not covered under the definition of 'goods' as per the CGST Act.

'Service' on the other hand has been defined with an intent to give very wide scope, i.e., to mean anything other than goods, money, and securities. Hence, the exclusion category for services is 'goods', 'money' and 'security'. Cryptocurrency does not have any legal status and hence it cannot be covered by the definition of money as per Section 2 (75) of the CGST Act

The definition 'Security' has been borrowed from the Securities Contract Regulations Act, 1956, which reads as follows:

Section 2(h) "securities" include-

(i) 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;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic)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;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;

It can be observed that a derivate is also covered within its scope 'Security'. For a VC to be considered as a 'Security', the nearest feature which can be considered is that of a 'derivative'. To understand the meaning of 'derivative', reference is to be made to the definition of "derivative" from the Securities Contracts (Regulation) Act, 1956 which is extracted below:

Section 2 – Definitions

(ac) "derivative" includes-

(A)  a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities]]

(C) commodity derivatives; and]

(D) such other instruments as may be declared by the Central Government to be derivatives;]

As already discussed in Part-I of this Article series, a VC is not based on any underlying asset, rather it is a reward for finding the solution which would add a block to the existing chain.On a perusal of the inclusions to the above definition of a derivative, it can be observed that VC's can be considered neither as a security derived from an underlying instrument nor as a contract that derives its value from underlying securities. Further, the other portion of the definition is also not applicable to the present case. In light of the above analysis, it is possible that VCs possess the potential to be brought under the definition of 'Service' for the purpose of GST laws.

2.1.  Proposal - GST on trading of VCs

Based on various recent news reports, the Government of India is believed to be in the process of structuring a regulatory framework for VCs. It has also been reported that the Central Economic Intelligence Bureau (CEIB) has proposed to impose 18% GST on VC transactions. The key points of the proposal are as follows:

- Mining is proposed to be treated as a supply of service since it generates cryptocurrency as a reward. Tax to be proposed to be collected from the miner on transaction fees or such reward. Registration is mandatory if the aforesaid reward threshold exceeds? 20 lakhs.

- Other related transactions will be considered as supply of services including supply, transfer, storage, accounting, among others.

- Value of cryptocurrency is proposed to be determined basis the transaction value in rupees or the equivalent of any freely convertible foreign currency (i.e., traditional legal tender).

- 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.

- 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.

- Integrated Goods and Services Tax ('IGST')is proposed to be levied on transactions outside India and would be considered as import or export of goods. IGST is proposed to be levied on cross-border supplies as well.

- Rate of tax on trading is proposed to be levied at a rate of 18%.

As per the aforesaid proposal, it can be interpreted that upon VCs being notified by the Reserve Bank of India ('RBI'), the levy of GST would take place accordingly based on the recognition and classification.

2. Conclusion

Owing to the huge volume of transactions and the massive amount of market capitalization, the levy of CGST on cryptocurrency would prove to be advantageous for the following reasons:

a. Revenue boost for the Government.

b. Security of such transactions; and

c. Statutory regulation of investing activity.

The said advantages would be due to the policies and safeguards that monitor the activity in VCs. The transactional footprint of cryptocurrency would be reflected in the digital waves of the economy due to the cryptocurrency and regulation of official digital currency Bill, 2021 ('VC bill'). The said VC bill is being introduced with the following objective:

"To create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses."

On a prima facie observation of the present scenario, it is believed that the Government of India wants to deter transactions in VCs to protect the consumers from the hazards of a structurally unstable and volatile concept. In the alternative, the Government may intend to create a structural framework for embracing the new form of currency, since it could be another path breaking revolution which breaks free of the shackles of a regulated monetary system. However, the prohibition of all private cryptocurrencies, subject to certain exceptions for promotion of the underlying technology, could be an attempt to communicate the intention for domestic block chain innovation. At this juncture, levy of tax on virtual currency is a grey area and is open to interpretation in the absence of adequate legislative framework.

(*The authors are Senior Associate and Associate at Shivadass & Shivadass (Law Chambers) The Authors would like to acknowledge the contributions of Ms. Mahek Agarwal, a 3rd year law student from Symbiosis Law School, Hyderabad. The views expressed are strictly personal.)

See Part–I & Part-II

Editor: The three-part series stands concluded.