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This article is more than 7 month old.

Explained: Proposed indirect tax policies on cryptocurrency and implications

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Cryptocurrency can be easily touted as one of the most highlighted ingenuity of the decade.

Explained: Proposed indirect tax policies on cryptocurrency and implications
Authored by Smita Singh
Cryptocurrency can be easily touted as one of the most highlighted ingenuity of the decade. Various countries deal with cryptocurrencies differently, e.g. in the USA, Bitcoin is treated as an asset. At the same time, Singapore recognizes Bitcoin as a valid currency, and Japan treats it as a commodity.
However, there are many countries, including India, which are uncertain about its model and projections. Nevertheless, Bitcoin trade in India is valued to be around a whopping Rs 400 billion and ranked among the top five countries of the world. This was made possible only after the Supreme Court struck down restrictions on trading in cryptocurrencies.
The Reserve Bank of India does not recognize cryptocurrency as a medium of exchange. Further, the government or any other regulator in India has also not given a license to any agency for working as an exchange or any other kind of intermediary for cryptocurrency. Looking at the size of the cryptocurrency market in India, a regulatory framework must be put in place for cryptocurrency before its treatment for tax purposes is considered. However, the government intends to introduce a cryptocurrency bill seeking a ban on “private cryptocurrencies”.
In terms of various reports, the Central Economic Intelligence Bureau (CEIB) proposed the Ministry of Finance recommending a levy of 18 percent GST on bitcoin transactions. The CEIB has suggested that bitcoin might be categorized as an ‘intangible assets’ class, and GST could be imposed on all transactions.
Here are key points of the proposal of CEIB are:
  • Treatment of Cryptocurrency `mining' as a supply of service since it generates cryptocurrency and involves rewards and transaction fees.
  • Taxing of `wallets' storing keys. Wallet service providers should be registered under GST.
  • Registration of Cryptocurrency exchanges under GST and levy of tax on their earnings.
  • Trading in cryptocurrency to be taxed @18 percent.
  • Buying and selling of cryptocurrencies to be considered as a supply of goods.
  • Other related facilitating transactions, including supply, transfer, storage, accounting to be treated as services.
  • Determination of value of cryptocurrency.
  • Where both buyer and seller are in India, transactions to be treated as a supply of software and taxable at the buyer's location.
  • For transfer and sale, the place of supply to be the location of the registered person. However, where the sale is to a non-registered person, the supplier's location is considered a place of supply.
  • Integrated GST payable on transactions outside the taxable territory and considered as import or export of goods.
  • However, the Central Board of Indirect Taxes and Customs will have to put such a proposal before the GST Council for consideration before implementing any or all proposals. Although the potential benefit of taxing cryptocurrencies will provide an exponential rise in revenue, certain specific issues that need to be confronted.
    Firstly, the treatment of Bitcoin as good or services. It is important to note that RBI has not notified any virtual currency as recognized currency to date, and it looks like an unlikely scenario. However, if Bitcoin were to be recognized as a currency, it gets immediately out of the purview of GST since ‘goods’ do not include currency.
    Having said that, GST should be applicable to the trading of cryptocurrencies as the definition of goods is wide enough to cover such intangible goods. However, it is to note that if Bitcoin is sold for cash, there would be a single supply that should be subject to GST. But where Bitcoin is traded for another good, it is a barter transaction with two simultaneous supplies; therefore, GST would be payable twice, resulting in a substantial GST impact.
    Secondly, the valuation of such transactions is another point of probable contention. As Bitcoins are traded around the world at different rates and even intraday prices sometimes considerably vary, it is possible that this could also potentially lead to litigation. Issues may further arise in respect of exchanges as to the value on which GST is payable. Ideally, the tax should be payable only on the service fee component charged; however, it may be another point of disagreement.
    Thirdly, the place of supply of trading in virtual currency is another grey area since there are difficulties in determining whether it will be an inter-State or intra-State supply of bitcoins. This would also impact consideration of the transactions being across borders or not as well. Further, the taxation and registration implications would differ significantly based on the location of the supply.
    There is no doubt that blockchain technology has enormous potential; thus, outrightly banning cryptocurrencies is not the solution despite the complexities involved. There are sufficient benefits to consider regulating it and limiting misuse. Treatment for bitcoins would be ideal if the government were to legalize the trading of these virtual currencies and charge GST on margins that bitcoin exchanges charge their users. This will safeguard that trading of cryptocurrencies is regulated and enhance tax revenues for the government.
    Smita Singh is Partner, Indirect Tax, Customs & Trade Group at Singh & Associates. Views are personal
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