The treatment for bitcoins would be ideal if the government were to legalise the trading of these currencies.

Virtual currencies like Bitcoin, Ethereum, and Monroe find themselves in a grey area in India. In December 2017, the Indian government cracked down on the cryptocurrency market. Earlier this year, in a move that could attract huge tax gains, taxmen issued notices to over five lakh individuals dealing in cryptocurrency. Representatives of India’s top seven bitcoin exchanges including Unocoin, Zebpay, BtcxIndia and CoinSecure approached the Authority for Advance Ruling (AAR) because there is little clarity on their very existence.

In April 2018 the Reserve Bank of India (RBI) placed a ban on banks from dealing with organisations related to cryptocurrencies. The government, too, has issued periodic warnings about the perils of doing business on virtual currencies. But so far regulators have refrained from according them a legal or illegal status.

The first piece of clarity came in February this year from the direct taxes department. According to them, not paying taxes on any assets attracts penalty, and a proposal has been drafted. This proposal includes some important tax impositions on cryptocurrency trading.

The Central Board of Indirect Taxes and customs is mulling over a proposal that will further be put before the GST Council.

Key points of the proposal

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 Rs. 20 lakh, individual miners will need to register themselves under the Goods and Services Tax (GST).

The proposal also considers 'wallets' storing keys taxable. Wallet service providers should be registered under GST.

Cryptocurrency exchanges need to register and pay tax on their earning.

Trading may attract 18 percent GST

Buying and selling of cryptocurrencies 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

The transaction value in rupees or the equivalent of any freely convertible foreign currency will be used to determine the value of cryptocurrency

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

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

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.

Currency or not

While many developed economies recognise cryptocurrencies as legal tender, there are many countries where bitcoin is not explicitly legal or illegal but where a banking ban on them is in place. Among these is Vietnam, which allows trading in cryptocurrencies, but does not recognise them as a payment tool.

In India, the Foreign Exchange Management (FEMA) Act, 1999 [Sec.2 (h)] defines currency to involve 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 can cryptocurrency be considered currency within the existing definitions?

Although the RBI has not notified bitcoin as legal tender, the fact that bitcoin is an accepted mode of payment is pertinent. Therefore, in principle, the RBI should recognize it as currency, and not as goods. The digital asset in the country could be classified under the category of 'intangible goods', at par with other software systems with separate laws introduced to prevent and penalize criminal use of cryptocurrencies. (As the CBITC posits, the decision of the panel to levy GST on digital currencies could also be useful in regulating digital currencies.)

Taxation could be made simpler if cryptocurrencies were treated as goods, and actions of bitcoin exchanges on behalf of customers were considered services. In sum, this new proposal would change the way virtual currency is being handled in India.

Bitcoin global scenario

The bitcoin dealing differs a lot depending from country to country. The United States of America treats bitcoin as an asset, which can be in the nature of a fixed asset, or an inventory asset. The United Kingdom, on the other hand treats it as a ‘private currency’. Australia has a case-to-case treatment for bitcoins, ranging from a traded asset to an investment, with different treatment to the related services of mining or trade facilitation. Singapore recognizes bitcoin as a valid currency, while Japan treats bitcoin as commodities.

Bitcoin Indian scenario

The RBI has asked its own regulated entities (such as banks) to stop providing service to individuals or business entities dealing in cryptocurrencies for fiat (INR) on and off-ramps. This prohibits from buying/selling cryptocurrencies for INR through banks.

Despite all limitations, India ranks among the top 5 countries of the world, from the perspective of share of currency held (although these cannot be traded currently) which is at 44 percent of the world’s share.

Given the uncertainties related to bitcoin, and the relatively nascent state of its development one thing is clear – bitcoin is going to take time to be widely accepted as a currency or means of exchange in India. This will lead to the typical reaction of such exchanges shifting base outside India, and eventual losses of huge potential tax revenues.

The treatment for bitcoins would be ideal if the government were to legalise the trading of these currencies. The currencies should be treated as current assets, and GST should be charged on the margins that bitcoin exchanges charge their users. This will ensure that the trading of the currencies is regulated, as well as adding to tax revenues for the government.

(The write is Product Manager - GST India, Avalara Technologies Pvt. Ltd.)