[By Muskaan Desai]
The author is a student at the National Academy of Legal Studies and Research, Hyderabad.
Cryptocurrency in India has been an unregulated area with a lot of uncertainty. The legality and taxability of cryptocurrencies have been contentious issues. The Central Government, through its draft Cryptocurrency and Regulation of Official Digital Currency Bill, has sought to ban private digital currency and introduce a Central Bank Digital Currency which will act as a nationalized digital currency backed by the rupee. Though the bill was set to be introduced in the Lok Sabha during the Monsoon Session, it did not get listed for debate. It needs to be seen as to how the implications of GST will change with the introduction of regulation on cryptocurrency.
Current Position
As of today, there is no clarity as to the taxability of cryptocurrency under GST or under which category of supply it would fall. Though the SC in its judgement in Internet and Mobile Association of India v RBI reversed RBI’s order of disallowing trade of cryptocurrencies through banks, it still remains unregulated and unrecognized by RBI. Therefore, it is clear that cryptocurrency does not come under the ambit of money under CGST. The trade of cryptocurrency is akin to that of securities on stock exchanges, i.e., though it does not fall under any of the categories mentioned in the definition, the provision is an inclusive one and includes any such marketable securities of like nature, under the ambit of which cryptocurrency can be brought. However, it is decentralized and not regulated by any security market regulator, thereby not falling under S.2(h) SCRA. Therefore, it is neither money nor security and hence can be brought under the ambit of ‘goods’ under the CGST Act. Under S.2(52), CGST Act goods include movable property excluding money and securities. The movable property includes both tangible and intangible property. Assuming that there is no controversy about cryptocurrency being a movable property and an intangible asset, it could be brought under the definition of goods under CGST. In this case, the exchange between supplier and recipient can be taxed separately undersupply of goods. The CBIC has also proposed to impose a GST of 18% on overseas cryptocurrency exchanges. Cryptocurrency is made taxable under the slab of 18% which includes Capital Goods and Industrial Intermediaries among other items, hence pointing towards an intention of CBIC of bringing its trading under the ambit of supply of goods.
The CBIC now seeks to regulate the cryptocurrency domestically by bringing its mining and charges paid to intermediaries for facilitating its trading under the ambit of supply of services. It is interesting to note that the cryptocurrency exchanges which act as intermediaries have already been collecting GST from their customers for the supply of services. Hence, despite cryptocurrency not being regulated either by RBI or through a statute yet, it is sought to be regulated through an indirect tax regime.
Future Context
With the central government seeking to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, it becomes pertinent to analyse the repercussions that it will have on the taxability of cryptocurrency through the introduction of CBDC. It is also pertinent to appreciate that despite the bill not being tabled during the current monsoon session, the RBI seeks to introduce a Central Bank Digital Currency independent of the bill.
The Bill seeks to ban private cryptocurrencies and introduce a centralized digital currency backed by the rupee and regulated by the RBI. This move has received both praise and criticism but the practical repercussions of it are yet to be seen. The bill, under S.2(1)(a), defines digital currency as “Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having an inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes”. This definition is very broad in nature and seeks to cover any digital currency, irrespective of whether it is generated through cryptographic means or shares the same concerns of cryptographic currency. In this article, the focus remains only on cryptocurrency.
The bill does not have any provisions with respect to taxation of digital currency under direct or indirect tax regimes. However, the above definition of cryptocurrency under the draft bill clarifies that the currency would have an inherent value in a business transaction, i.e., its trading can be categorized as a business activity. If it is accompanied by a consideration, it falls under the definition of supply under S.7 of the CGST Act. Through analysis, CBDC could either be taxed as services or exempted from GST depending on the context of a transaction.
Money– The introduction of a nationalized currency would require amendments to various acts, including the RBI Act and FEMA to bring it under the scope of a legal tender. In any case, the mere recognition of CBDC by RBI would lead to cryptocurrency being identified as ‘money’ under S.2(75) of CGST Act and hence its trading would be exempt from the scope of supply of goods nor services. However, according to S.2(102) explanation 2, a related transaction involving a consideration other than money (cryptocurrency in the current context) is still taxable as a service. Hence, if trading of cryptocurrency is facilitated by an intermediary, the consideration paid can still be brought under the scope of supply of services and taxable under CGST.
Securities– The recognition of digital currency by RBI could bring it under the scope of securities under S.2(101) CGSTAct which relies on S.2(h) SCRA. As discussed above, the trade of cryptocurrency has the characteristics of trading securities under the stock exchange. Referring to the definition of cryptocurrency under S.2(1)(a) of the draft bill, it can be inferred that cryptocurrency has the potential of being invested, i.e., it also has a capacity of being marketable. Hence if brought under the definition of securities, this would again exempt CBDC from the scope of goods or services under CGST. Countries like Canada have listed Cryptocurrency on its stock exchange and brought it under the jurisdiction of financial market regulators to avoid tax evasion. Cryptocurrency, if identified as security, could be regulated by SEBI, and listed on NSEs and the intermediaries facilitating such exchanges for consideration be taxed CGST for the supply of services.
OIDAR Services
The CBIC, as mentioned is planning on introducing an 18% tax on overseas cryptocurrency exchanges in a first move to bring in cryptocurrency under GST. The services are sought to be categorized as OIDAR services under IGST. The service is seen as ‘providing of data services’ and hence any cryptocurrency trading service being availed by any person recipient in India or any entity registered in India will be liable to 18% GST. The Indian exchanges are as mentioned charging a rate of 18% already despite there being no clarity on taxability within India. The introduction of CBDC by RBI might clarify the stance of Indian exchanges which could also be classified as OIDAR services under IGST. However, if the Digital Currency Draft Bill is passed, which seeks to ban private cryptocurrency, it would prove harmful not only to exchanges but also deplete the GST revenue from the taxation of cryptocurrencies.
Therefore, it needs to be seen as to how the central government seeks to control private cryptocurrencies and parallelly introduce a national digital currency keeping in mind tax, especially indirect tax implications.