TAXATION OF BITCOINS UNDER INCOME TAX & GST IN INDIA

Posted By on December 17, 2017

A) WHAT IS A BITCOIN?

BITCOIN is a Crypto-Currency that works on Distributed Ledger System or BlockChain concept, which operates on an undisclosed Algorithm and is capable of recording transactions between two parties efficiently and in a verifiable and permanent way.

Key Elements of a BITCOIN are:-

1. Uses Hash Pointer as a link between Blocks;

2. Maintain records of transaction data with a Timestamp; and

3. Efficient, verifiable and permanent – cannot be altered retroactively.

 

B) IS BITCOIN LEGAL IN INDIA?

BITCOIN as a medium of payment that has neither been authorised nor being regulated by any central authority in India; Currently no set of rules, regulations or guidelines have been laid down for resolving disputes that could arise while dealing with BITCOINS;

Given the above background “One cannot conclude that BITCOINS are illegal since till now, there is no ban on BITCOINS in India.

Our View on Legality of BITCOIN : BITCOIN at present is unregulated and is not covered within the meaning of currency of legal tender in India AND a more appropriate way of treatment of BITCOIN is to treat it like a digital commodity that has been ascribed an arbitary value by those who deal with it. A retrospective Law or Clarification by government cannot be ruled out in case of BITCOINS.

 

C) HOW DO YOU GET BITCOINS?

SOURCE 1 : MINING

The process of adding transaction records to Bitcoins Public Ledger of past transactions i.e. finding new Blocks with a  SHA-256 hash of a Blocks Header, that is acceptable by the network is called Mining; The rate of discovery is approximately 1 block in every 10.71 Minutes [i.e. 60 min * 24 hrs * 15 days / 2016]. Current reward for finding a new Block is 12.50 Bitcoins, which will be halved after discovery of every 2,10,000 blocks;

SOURCE 2 : PURCHASING

Bitcoins can be purchased against real currency from Bitcoin Exchanges and store them in an online Bitcoin Wallet in a Digital Form;

SOURCE 3 : RECEIVED AGAINST SALE OF GOODS & SERVICES

You can receive Bitcoins (instead of real currency) on Sale of Goods and Services.

 

D) TAXABILITY OF BITCOINS UNDER  THE INCOME TAX ACT OF INDIA

 

SOURCE 1 : BITCOIN GENERATED THROUGH MINING

Accounting Treatment A : BITCOIN Treated as Capital Asset by the Assessee

>  Bitcoins created by Mining are Self Generated Capital Asset;

>  The Cost of Bitcoin is NIL;

>  Income Tax on Capital Gains from sale of Bitcoin has to be paid as   below:-

Period of Holding BITCOIN Treatment Rate of Income Tax
Upto 36 Months Short Term Capital Asset Same as applicable on other Incomes of the Assessee
More than 36 Months Long Term Capital Asset 20% of Sale Value

NOTE : Few consultants considers Sale of Bitcoins generated by Mining as Exempt, since their cost cannot be identified, referring the decision of H’ble Supreme Court in the case of CIT v B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). We do not agree with this view, since BITCOIN are covered within the definition of Capital Asset as per Sec 2(14) of the I. T. Act and this view may be a matter of debate & Litigation.

 

Accounting Treatment B : BITCOIN Mining is the Business of the Assessee

>  BITCOINS are Stock in Trade for the Assessee;

>  All direct expenses incurred in the process of Mining of Bitcoins like   Electricity, Salaries, Depreciation of  Computers etc shall be considered   as the cost of Bitcoins; and the closing stock of Bitcoins at the year end   shall be treated as lower of Cost or Net Realisable Value;

>  The proceeds from the Sale of Bitcoin shall be Revenue Receipt of the   Assessee;

>  Net Profit = Sale Value of Bitcoin – Cost of Bitcoin Generation;

>  Income Tax = Net Profit * Applicable Rate (Slab) of IT on Assessee

 

SOURCE 2 : BITCOIN PURCHASED AGAINST REAL CURRENCY

Accounting Treatment A : BITCOIN held as Investment by the Assessee

>  Cost Price (CP) = The cost at which the Bitcoins are purchased from the   Bitcoin Exchange;

>  Indexed Cost (IC) = Cost*Index No of Sale Yr/Index No of Purchase Yr

>  Sale Price (SP) = The price at which the Bitcoins are sold on Bitcoin   Exchange

>  Income Tax on Capital Gains from sale of Bitcoin has to be paid as   below:-

Period of Holding BITCOIN Treatment Taxable Value (TV) Rate of Income Tax
Upto 36 Months Short Term Capital Asset TV = SP – CP Rate as applicable on other Incomes of the Assessee on TV
More than 36 Months Long Term Capital Asset TV = SP – IC 20% of Taxable Value (TV)

 

Accounting Treatment B : Sale & Purchase of BITCOIN is the Business of the Assessee

>  BITCOINS are Stock in Trade for the Assessee;

>  Cost Price (CP) = The cost at which the Bitcoins are purchased from the   Bitcoin Exchange;

>  Business Expenses (BE) = All direct & indirect expenses related to   business of the assessee including Salaries, Rent, Electricity,   Depreciation etc shall be considered as Business Expenses;

>  Sale Price (SP) = The price at which the Bitcoins are sold on Bitcoin   Exchange;

>  Net Profit = SP – CP – BE

>  Income Tax = Net Profit * Applicable Rate (Slab) of IT on Assessee

 

SOURCE 3 : RECEIVED AGAINST SALE OF GOODS & SERVICES

  >   Bitcoins will be treated as consideration received against sale/ supply in   lieu of Money;

>  Any profit generated on (a) Sale of Goods and Services and (b)   subsequent Sale of BITCOINS, will be treated as Business Income of the   Assessee;

>  Income Tax will be payable on the profits at the Applicable Rate (Slab) of   Income Tax on the Assessee.

 

E) GST LIABILITY ON SALE OF BITCOINS

Query No. QUERY & REPLY
FAQ 1 : Are BITCOINS covered within the meaning of Supply under the GST Act?
Our View : Yes – In our view, they are treated as Supply within the meaning of Section 7 of the CGST Act, 2017 since BITCOINS are not covered under any of the below exclusions:-a)Money [as per Section 2 (75) of CGST Act, 2017];b)Securities [as per clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956]; and

c)Schedule III of the CGST Act, 2017;

FAQ 2 : Are BITCOINS Exempted, NIL Rated or Zero Rated Supply under GST?
Our View : No
FAQ 3 : Who is responsible to pay GST in a Transaction of GST?
Our View : The liability for collection & payment of GST on BITCOINS is on the Seller of BITCOINS.
FAQ 4 : Is there any basic exemption limit prescribed under GST that applies on Sale of BITCOINS?
Our View : Yes – Basic exemption limit for registration u/s 22 of CGST Act, 2017 upto a limit of Rs. 20 Lakhs (10 Lakhs in Special Category States) of Aggregate Turnover is also applicable of BITCOINS. But this limit covers global turnover of the assessee in a year, including exports & exempted turnover.
FAQ 5 : Whether BITCOINS are covered under Goods or Services?
Our View : In terms of Schedule II of the CGST Act 2017, development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software and temporary transfer or permitting the use or enjoyment of any intellectual property right are treated as services. But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.In our view, in case of first sale of Bitcoin after Mining, they would be treated as Service and second sale of Bitcoin should be treated as Goods.
FAQ 6 : What should be the Rate of GST on BITCOINS?
Our View : In our view, sale of Bitcoins are liable to GST @ 18%.
FAQ 7 : In case of default of GST, who would be held responsible:-a)The Buyer;b)The Seller; or

c)The BITCOIN Exchange

Our View : As discussed earlier, sale of Bitcoin is not covered under RCM and hence the liability for GST on Bitcoin is on the Seller.

NOTE – The laws related to GST and BITCOINS are both under evolution in india and we have drafted the above FAQs and Answers only for informational purpose and based on our interpretation & understanding of Law. There may be difference of opinion in the above matter and a different view may emerge on a later date. It is suggested to take a specific legal opinion before relying on the contents of above FAQs.

 

F) STAND OF GOVERNMENT ON BITCOINS

Taking cognisance of concerns raised at various forums from time to time on increasing use of virtual currencies (VCs) and the regulatory challenges, the Department of Economic Affairs (DEA) constituted a committee with representations from DEA, Department of Financial Services (DFS), Ministry of Home Affairs (MHA), RBI, Niti Aayog and SBI. The committee has submitted its report and it is being examined.

In August, 2017 Sh. Arun Jaitley has informed the Parliament that there are no regulations governing virtual currencies, including bitcoins, in India and the RBI has not given any licence to any entity/company to operate such currencies.

During a press conference in Nov end this year (2017) the Finance Minister has reaffirmed that recommendations on Crypto Currencyies are being worked at. Further clarified the government’s position that it does not recognise Crypto Currency (bitcoin) as legal currency for now.

 

OUR VIEW & SUGGESTION

Who created BITCOIN Algorithm is not known. Its existing quantity and  future generation (mining) are also logical estimates only, with no accurate assurance. The Laws and Regulations related to BITCOIN are under development and may even be applied with retrospective effect.

It is suggested to properly evaluate and make proper disclosures of all transactions related to BITCOIN in your financial returns and ensure compliance of Income Tax, GST & FEMA Laws while dealing with BITCOINS.

BITCOINS IN INDIA

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DISCLAIMER

The Views expressed on this blog are strictly personal and for knowledge of our clients only. The contents of this blog are solely for informational purpose and it does not constitute any professional advice or recommendation. The laws related to GST and other taxes are under evolution and subject to constant changes and amendments over time. It is suggested to take specific legal advice and necessary due diligence before relying on the contents and information of this Blog. The authors of this blog, does not accept any liabilities for any loss or damage of any kind arising out of information on this blog and for any actions taken in reliance thereon.