Guest Post – Anujith
Bitcoin exchanges in India are trying to ascertain their tax liabilities. The key questions are whether bitcoins will be treated as currency, or they will be treated as goods or services which will bring them in the purview of Indian Goods and Services Tax (GST). The exchanges have asked for clarifications from the tax authorities.
There are multiple questions that need clarification, as following:
- Can bitcoin be regarded as currency? If they can be, then bitcoins will not attract GST, which is the indirect tax that has come into effect from July 1st 2017, making India one unified common market. If classified as a currency, then only the trading transaction fees will fall under GST. India’s Foreign Exchange Management Act 1999 (FEMA) defines what can be considered as currency in India, and cryptocurrency or any form of digital currency is not included in the definition. India’s central bank, which oversees Indian monetary policy, is Reserve Bank of India (RBI). RBI has already issued three warnings, where they have stated that bitcoins are not recognized as legal tenders in India, and anyone trading in them must manage their own risk. At least for now, it seems that there is very low chance of bitcoins being treated as currency. It’s also important to note that if bitcoins are categorized as currency, any trading in bitcoins will need to be compliant with FEMA.
- If bitcoins are not considered as currency, will they be treated as goods, or services? If classified as goods, then the bitcoin exchanges will be subjected to an 18% tax slab under GST. On the other hand, a classification as a service will bring in the 12% tax slab in consideration.
- The exchanges want to know whether the tax computation will be done on their margin, or their revenue. The combined revenue of the top seven bitcoin exchanges operating in India was US $ 6.3 billion, and if the Indian tax authorities consider bitcoins as goods, and compute tax liabilities on the revenue, then at the rate of 18% applicable for goods, the tax liabilities will be US $ 1.13 billion.
- Another question is whether bitcoins will be considered as capital assets. According to Section 2(14) of Indian Income Tax Act, 1961, a capital asset means a property of any kind held by a person, while there is no statutory meaning of the term ‘property’. Effectively it means every possible interest that a person can acquire, hold or enjoy. If bitcoins are bought for investment, they could be considered as capital assets. Consequently, selling of bitcoins after holding them for a time period of over 36 months will attract long-term capital gains tax, at the rate of 20%. Selling bitcoins after holding them for lesser period of time will attract short-term capital gains tax, at the rate of 30%.
- If deemed capital asset, there is yet another question regarding trading of bitcoins. If the trading transactions are substantial and frequent then the income will be taxable as business income.
- The process of generating new bitcoin is called “Mining” or “Minting”. Will the currencies earned during the mining process be taxable? If earnings through bitcoin trading is considered as business income, then the currencies earned through mining will be taxable as business profit. However, if the holding of bitcoin is considered as capital gain, then the situation changes. The bitcoins earned through the mining process will be classified as self-generated capital assets. Since the cost of mining bitcoins can’t be accurately ascertained, the taxpayer can take advantage of a 1981 verdict of Supreme Court, i.e. India’s highest court, which stipulated that if cost of acquiring capital assets can’t be computed, then there will not be tax liability for that capital asset.
Indian tax authorities have visited multiple bitcoin exchanges across the country to review information and records of traders in India. The tax authorities are likely to send notices to 500,000 high net-worth individuals asking them to pay capital gains taxes on their bitcoin investment and trading activities. According to the tax authorities, some exchanges have not paid any sales or value-added tax, have not submitted complete information, and there are mismatches found between annual results and explanations submitted to tax authorities. At least one bitcoin exchange has filed an application with Advance Authority of Ruling (AAR), asking for clarification on their tax liabilities. AAR is a judicial body that clarifies taxation related queries that companies have in India. It appears that since the authorities are still trying to understand the complexities involving bitcoin, there may be some delay in issuing clarifications. The Union Government of India is planning to introduce a regulatory framework for cryptocurrencies in the forthcoming annual union budget, and this could provide some of the required clarity.