Cryptocurrency, the India story

Excerpt from a recent news article read ‘If you had invested INR 4,500 in Bitcoin in 2010, today the investment would be worth INR 459 Crores.’ This does not make sense! Why is it that most people reading this article would not even think about making this kind of money in seven years flat. Maybe we did not know what Bitcoin meant back then and when we got to know about it, we thought it is some Ponzi scheme (Some analysts still believe that it is a big bubble which will go down under very soon).

So if you have had wisdom and would have put aside 4500 in some technology which you don’t understand, it would have made you richer than many of the industrialists and think about the return on investment (Let’s not talk about the tax you would pay on the income). Who knows, you would have been on the front page of business magazines like Mukesh Ambani’s son making news all around.

Cut to reality. You did not invest even a single rupee in Bitcoin and are wondering how is it going to impact your life being in one of the fastest developing countries of the World. The Good news is that it is not going to impact your daily life (read transactions) any sooner but the Bad news is that if you do not understand what it means, it may be too late to catch the bus.

Bitcoin is one of the types of ‘’Cryptocurrency’’ or ‘’Digital Currency’’. For those who know, please skip this para and for the uninformed, a cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of its security feature. A defining feature of a cryptocurrency is its organic nature; it is not issued by any country or central authority, rendering it theoretically immune to government interference or manipulation. Cryptocurrency uses Blockchain technology (or distributed ledger) which is by far is touted as the most secure technology against the hacking threats. There is no physical currency and balances are kept on a ledger in the cloud. There are currently more than 780 reported Cryptocurrencies in the world.

So, what is the India Government saying about Cryptocurrency?

Virtual/digital currencies are not recognized by the Reserve Bank of India (RBI) or any other authority in India, as a ‘currency’. The official communication from RBI through a press release way back in December 2013 cautioned users, holders and traders of virtual currencies, including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks.

The risks perceived are that use of digital currencies for illegal, antisocial and illicit activities may not be controllable. Since there is lack of information of the trading parties, such peer-to-peer non-regulated system may expose the investors to unforeseen losses including breaches of anti-money laundering and financing of terrorism laws.

RBI in its latest Press Release Dated February 1, 2017 has stated that it has not given any license/company to operate such schemes or deal with any virtual/digital currencies. RBI also added that the user, holder, investor, trader, etc. dealing with virtual/digital currencies will be doing so at their own risk.

Some experts compare bitcoins to the prepaid instruments which are regulated by the RBI. However, no such recognition of digital currencies under ‘payment systems’ or ‘prepaid instruments’ has been made by the RBI. At present, prepaid instruments, based on their classification and use are regulated by RBI.

And what would be the Taxation impact?

The Foreign Exchange Management Act (‘FEMA’) defines the term currency to include, ‘all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank’

For the purposes of the CGST Act 2017, the term ‘money’ is defined in section 2(75) as ‘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 the Reserve Bank of India 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’

Evidently virtual/ digital currencies do not qualify under any of the above definitions.

Primarily the taxation for any goods/services is governed by their classification under the taxation law. Some views classify the virtual/digital currencies under the definition of ‘computer programme’ or ‘Computer Software’. A possible classification as goods also has been looked at considering the fact that currency is a “medium of exchange” i.e. it has a value ascribed to it and is traded on the various exchanges.

Since there is no clarity on the tax treatment in India, it is helpful to look at the treatment being made in countries which have accepted the digital currency. Some jurisdictions have defined Bitcoin/cryptocurrencies as ‘other negotiable instruments’ and hence exempt from VAT/GST while others classify it as ‘intangible property’ subject to GST. The supply of the cryptocurrency is treated as a supply of services under Singaporean tax law and hence GST is payable on supply, as well as on any subsequent trade of ‘virtual currency’ for other goods or services. The Canadian Revenue Agency has taken a view that, digital currencies are intangible goods for tax purposes and to be dealt accordingly for tax purpose.

As we see, the Governments which have recognized the digital currencies have appropriately classified them based on their use in that country and considering the economic environment. The taxability issues have accordingly been defined, if not settled.

Considering the lack of clarity in India, there are bound to be immediate tax and regulatory issues which need to be addressed quickly by the Government. Let us agree that regulations on digital currencies will defeat their basic purpose of such currencies being free from any Government intervention however if somehow the digital currencies can be tracked, the resulting ease of business may surpass the ills being counted.

The Governments’ objective should be to encourage Indian Economy, particularly, in the Fin-Tech Sector, by removing impediments to the development and use of digital currencies and related technology in India. This will assist the entire Indian Fin-Tech ecosystem to be internationally competitive.

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