Cryptocurrency has become a parallel currency that allows the transfer of value held in a digital wallet, from one person to another, without going through a central authority or bank and to allow the digital asset, as consideration for the purchase of goods and services. The article is an insight into the impact of GST on Cryptocurrency (Bitcoin etc. ) or Digital Assets.
What is Cryptocurrency (Bitcoin etc.) or Digital Assets?
Before going forward, the meaning of Digital assets is important to be understood which are as follows:
Digital assets are nowhere defined in GST Law and the law is silent is on its meaning, categorization, and taxation. Accordingly, it may be relevant to decipher its meaning under allied law. Section 2(47A) of the Income Tax Bill, 2022, seeking to tax transactions in virtual digital assets, defines it as:
(47A) “virtual digital asset” means –
- any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
- a non-fungible token or any other token of similar nature, by whatever name called;
- any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
Digital assets or virtual currencies or cryptocurrencies, as they are called, use cryptography, to prevent counterfeit or double spending of the currency. They enable secure online payments without the use of third-party intermediaries. “Crypto” uses a decentralized network based on blockchain technology, having various encryption algorithms and cryptographic techniques that safeguard transactional entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
What is Blockchain Technology?
Blockchain technology is basically a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger. According to this, the uniqueness of blockchain technology is that each owner transfers the digital currency to the next by digitally signing encryption, say a hash of the previous transaction and the public key of the next owner (transferee), and adding these to the end of the digital currency. In this manner, a payee can verify the signatures, to verify the chain of ownership, preventing double payments or counterfeit.
Government’s apprehension of cryptocurrencies (Bitcoin) and private digital currency
All the regulators and the governments of various countries unanimously believes that though virtual currencies have not acquired the status of a legal tender, they nevertheless constitute digital representations of value and that they are capable of functioning as (i) a medium of exchange; (ii) a unit of account; (iii) a store of value.
A Press Release was issued by RBI on 24-12-2013 cautioning the users, holders, and traders of virtual currencies about the potential financial, operational, legal, and customer protection and security-related risks that they are exposing themselves to. The Press Release noted that the creation, trading or usage of Virtual Currency, as a medium of payment is not authorized by any central bank or monetary authority and hence may pose several risks.
CBDT Draft scheme for Banning cryptocurrencies (Bitcoin) in India
The Central Board of Direct Taxes (CBDT), by an Office Memorandum, dated 05-Mar-2018, submitted to the Department of Economic Affairs, a draft scheme that proposes a ban on cryptocurrencies. But the draft scheme advocated a step-by-step approach, as many persons had already invested in cryptocurrencies. The scheme also contained advice to carry out legislative amendments before banning them.
In Union Budget 2022, the Finance Minister Ms. Nirmala Sitaraman, in her budget speech spoke about the Introduction of Central Bank Digital Currency (CBDC) will give a big boost to digital economy. She said that a “Digital currency” will also lead to a more efficient and cheaper currency management system and proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23. The Union Budget 2022 also introduced a scheme of taxation of virtual digital assets.
Classification of cryptocurrencies under GST
Taxability of digital assets has become a point of question after the introduction of income tax on transactions of virtual digital assets and brings the requirement of analysis of its implications under GST.
As per Section 2(52) “Goods means every kind of movable property other than money and securities but includes actionable claim, 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”;
The Central Goods and Services Tax Act, 2017 defines ‘money’ under Section 2(75) to mean “the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by RBI, when used as a 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.”
Perusal of the term ‘Money’, Digital assets are not money or foreign currency recognized by RBI and hence will not be regarded as ‘Money’ as per CGST Act.
Further Section2(101) of CGST Act, 2017 defines Securities as “Securities shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956” which defines the term to include-
- 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;
(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable including mortgage debt, as the case may be;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interests in securities;”
After understanding the above term securities, Digital asset would not fall under assigned meaning.
Many interpretations has been provided to transactions in Digital Asset, in foreign jurisdictions:
- The Sherman Division Eastern District Court of Texas opined in SEC v. Trendon Shavers, [Case No. 4: 13-Cv-416 (August 6, 2013)] that “It is clear that bitcoin can be used as money. It can be used to purchase goods or services and as Shavers stated, used to pay for individual living expenses. The only limitation of bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies such as the US dollar, euro, yen and Yuan. Therefore, bitcoin is a currency or form of money…”
- The Commodity Futures Trading Commission (CFTC) took a view in In re Coinflip, Inc, [CFTC Docket No. 15-29 dated 17-09-2015] that virtual currencies are “commodities”.
In the instant case, it can be observed that cryptocurrencies are intangible and are made, marketed, and stored on physical servers. They can be bought and sold, transmitted, transferred, delivered, stored, and possessed. Private digital assets like Bitcoin and Ethereum are used for various purposes like a store of value, transfer of value, micropayments, and decentralized applications. These features and the demand for cryptocurrencies for these purposes indicates their utility. Therefore, it can be concluded that based on the text of the law, private digital assets are closest to be regarded as goods and can be classified as such under the GST law.
Impact of GST on Cryptocurrency (Bitcoin etc. ) or Digital Assets
The table below summarizes the possible implications under GST, of transactions connected with digital assets:
| Type of Transaction | Treatment | Implication in GST |
| Purchase of goods or services in exchange of private digital asset (say Bitcoin) | Regarded as exchange of goods for goods or services | Considering digital assets (bitcoin) to be goods, transfer of bitcoin in exchange of goods or services will be regarded as barter i.e. exchange of goods for goods or services, in return. As digital assets are not classified as such, the general rate of GST ought to be applicable. Alternatively, bitcoins may be regarded as intangible assets and classified as such. |
| Purchase of private digital assets (like bitcoin) on payment of money (Indian Rupee or foreign currency) | Seller of private digital asset will be subject to GST | Considering the digital asset (say bitcoin) to be in the nature of goods, the seller of bitcoin ought to be liable to charge GST for sale of bitcoin, in consideration for payment in money, at general rate of GST |
| Services provided in connection with sale or purchase or exchange of private digital assets | Taxable as Supply of services | Supply of services in connection with purchase, sale or exchange of digital assets for a consideration, charged as service fee, will be subject GST at standard rate, applicable for services. |
| Sale of private non-fungible tokens | Treated as an intangible asset other than software | NFT, which are capable to be sold on digital markets are treated in the same manner as sale of intangible and ought to be taxed as such at the rate applicable for intangibles |
India, is certainly considering taxing transactions in private digital assets. Consequent to growth in such transactions, in the absence of any formal mechanism provided under law, such transactions will be subject to tax at gross value. Ambiguity under law coupled with delayed administration could cause significant hardship to this industry. While the offenders have their way out, an ignorant assessee may be made to lose all gains from the deployment of his already taxed resources.
Conclusion for GST on Cryptocurrency (Bitcoin etc. ) or Digital Assets
Upon introduction of digital currency by RBI, the industry will be split between private digital assets and digital currency or assets backed by the government in which India’s digital currency will be regarded as money under GST and will not be taxed as such whereas transactions in private digital assets, will be taxed as goods unless banned or appropriately regulated.
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