NATIONAL LAW UNIVERSITY ODISHA

INDIRECT TAXATION PROJECT

0n

VIRTUAL CURRENCY AND INDIA: A DESCRIPTIVE STUDY OF LEGALITY AND

TAXABILITY

Submitted T0:

Prof. Anurupa Chettiar

Assistant Pr0fess0r 0f Law

Prof. Priyanka Anand

Assistant Pr0fess0r 0f Law

Submitted By:

Tarun Ghai (16ba112)

Nilanjan Kumar (16ba068)

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 TABLE OF CONTENTS

TABLE OF CONTENTS..................................................................................................... 2
ABSTRACT .......................................................................................................................... 3
1. RESEARCH METHODOLOGY ................................................................................ 4
1.1. RESEARCH OBJECTIVES ............................................................................................ 4
1.2. RESEARCH METHODOLOGY ...................................................................................... 4
1.3. RESEARCH QUESTIONS ............................................................................................. 4
2. CRYPTOCURRENCY: A GENERAL UNDERSTANDING................................... 5
2.1. UNDERSTANDING BLOCKCHAIN AND DISTRIBUTIVE LEDGER TECHNOLOGY ............ 5
2.2. SMART CONTRACTS .................................................................................................. 6
2.3. IMPACT ON INTERNATIONAL TRADE AND COMMERCE .............................................. 7
3. FUNCTIONAL BARRIERS IN MAKING CRYPTOCURRENCY A STANDARD
FORM OF EXCHANGE ..................................................................................................... 9
4. CRYPTOCURRENCY ON THE WHETSTONE OF INDIAN LEGAL SYSTEM12
4.1. VIRTUAL CURRENCY AS EITHER A CURRENCY OR A VALID LEGAL TENDER ........... 12
4.2. VIRTUAL CURRENCY AS A PROPERTY OR GOODS ................................................... 13
4.3. VIRTUAL CURRENCY AS A SECURITY...................................................................... 14
5. CRYPTOCURRENCY AND INDIAN TAXATION: A CROSSOVER ................ 16
5.1. UNDER THE INDIRECT TAX ..................................................................................... 16
5.2. UNDER THE DIRECT TAX .......................................................................................... 17

6. CRYPTOCURRENCY IN PURVIEW OF GST ACT, 2016 .................................. 20

6.1. FOR TRADERS ......................................................................................................... 20
6.2. INDIVIDUAL INVESTORS .......................................................................................... 20

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 ABSTRACT

Cryptocurrency as we all know is the future of payments. The authors have tried to extract as much
information as they could have gathered for this literature. This paper attempts to reflect on the
advantage of using Bitcoin and other forms of cryptocurrencies. It is imperative that the global
economies instead of being completely hostile to it attempt to employ a more experimental
approach towards virtual currencies would not only make trading easy but would also bring a
revolution in the way money is being traded in and around the world prove to be a way or a method
of generating revenue out of trading for the governments in and around the world.

The authors initially start with the concept of Cryptocurrency by understanding the key technology
such as Blockchain and the distributive ledger while understanding its general impact on
international trade and commerce, a prominent example of which is the Smart Contracts. The
Authors then go on to analyse cryptocurrency and the legal and functional barriers associated with
it which acts as major hindrances in making it a recognized standard form of exchange. The
authors then discuss certain characteristics of cryptocurrency and try to test its legality on the
whetstone of Indian legal framework. The authors finally go on to discuss the Indirect and Direct
Tax frameworks under the Central Goods and Services Act, 2017 and Income Tax Act, 1961 and
their applicability to the Virtual Currencies while taking the viewpoints of both the income and the
expenditure aspects of taxation.

The Authors after the discussion in the literature are of the view that although there is no
crystallized judicial structure regarding the legality of cryptocurrency in India, such illegality
would not be having any bearing on its taxability and that there are certain heads under which the
taxation of cryptocurrencies is feasible.

Keywords – Virtual Currency, India, Blockchain, Distributive ledger, Goods, Securities, Property.

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 1. RESEARCH METHODOLOGY

1.1. RESEARCH OBJECTIVES

1. To understand the concept of Cryptocurrency and the technical nuances behind it.

2. To analyse the effect of Cryptocurrency on international trade and commerce.

3. To understand the functional barriers which hinder such Cryptocurrencies to become

a recognized standard form of exchange.

4. To understand the legal aspects related to Cryptocurrency which may form a taxable
event.

5. To analyse the heads under which the same can be taxed.

1.2. RESEARCH METHODOLOGY

Instead of going for empirical research we have limited the scope of our research to doctrinal
study. This project work has been carried out following the critical analytical approach. Both
essential and auxiliary information has been utilized and looked at as a part of the
comprehensive way with the end goal of the exposition. The method of reference whenever
necessary has been taken after by the researchers in Bluebook 21st edition citation method.

1.3. RESEARCH QUESTIONS

1. What is the concept of Cryptocurrency and key technology behind it such as

Blockchain and the distributive ledger?

2. What are the the legal and functional barriers associated with it which acts as major
hindrances in making it a recognized standard form of exchange?

3. What is its legality on the whetstone of Indian legal framework?

4. What is the applicability of Virtual Currencies to the the Indirect and Direct Tax
frameworks under the Central Goods and Services Act, 2017 and Income Tax Act,
1961?

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 2. CRYPTOCURRENCY: A GENERAL UNDERSTANDING

Cryptocurrency at its is basically a virtual currency or a network of digital signatures with the
potential of being converted and be made into standard form of exchange. Many writers and
thinkers had tried to define virtual currency but still a perfect picture is yet to be drawn.
International Monetary Fund (hereinafter referred to as IMF) has defined cryptocurrencies
saying it as “a digital representation of value issued by private developers and denominated in
their own unit of account”. European Central Bank (hereinafter referred to as ECB) elaborates
it as a quantum of value which is digitally represented and, in some situation, can be used as
an alternative currency and yet isn't issued by any central bank, e-money foundation or any
sort of credit establishment.1 There are many different institutions which have tried to give
definition for eg.

 Financial Action Task Force (hereinafter referred to as FATF) has defined it as “a

digital representation of value that can be digitally traded and functions as a
medium of exchange and is a unit of account and thirdly a store of value, only
plethora being that it does not have the status of legal tender”2.

 Superintendent of Financial services, New York has defined it as “any digitised

unit of a type of digital signature that can be used a medium of exchange or a form
of digitally stored value”.

 European Union Institution defines it as “a digital representation of value that is

neither issued by the banks not necessarily attached to any person and can be
stored or traded and transferred.”3

2.1. UNDERSTANDING BLOCKCHAIN AND DISTRIBUTIVE LEDGER TECHNOLOGY

ECB quotes that “blockchain is basically a ledger of all transaction, grouped in a block, made
with virtual currency scheme”. Cryptocurrencies are based on the distributive ledger
technology which acts as a virtual form of record of the currency that is traded through the

1
Virtual Currency Schemes - A further Analysis, (Feb., 2015),
<www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf> accessed 5 December, 2018
2
Financial Action Task Force [FATF], Virtual Currencies Key Definitions and Potential AML/CFT Risks, at 4
(June, 2014) https://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-
potential-aml-cft-risks.pdf.
3
Commission, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive (EU)
2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist
financing and amending’, COM (2016) 450 final

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network along with active and immutable recording of such transactions. Because of the
transparency of the whole system, anyone can check the database without allowing them to
modify or alter it except the individual himself. All of the transactional history is saved in this
distributed ledger. Using this technology, the database can be checked by anyone, however
with no ability to modify or alter it whatsoever; hence, “this technology, at its very basic,
enables a decentralised, speedy, workable and albeit an exceptionally secure approach to
enjoin all types of transaction along with other transactions in a ‘distributed ledger’ sort of.
This method came into existence with the Bitcoin 14, is the “Blockchain Technology”, which
usually is based upon an open software existing publicly. Therefore, blockchain is a kind of
catalogue that designates a ‘block’ to a particular amount of records. Each such block is then
attached to the next block just like chain links, using a cryptographic signature. This makes
them quite similar with any book of ledger which apart from being immutable can also be
shared and corroborated with anyone having requisite permissions.

The significance of blockchain software has also been taken into consideration by the
International Monetary Fund, which while recognizing the probable benefits of virtual
currencies stated that “the distributed ledger technology fundamental some VC schemes
offers benefits that go well beyond VCs themselves”.4

2.2. SMART CONTRACTS

Nick Szabo, more than two decades ago in 1996 attempted to define smart contracts as “a
computerized protocol that executes the terms of a contract”5. Colloquially saying, smart
contracts are those which are drafted using a computer language and is executed by a machine
and without needing any third party for doing so.
Subsequently, the usage of blockchain in smart contracts not only makes the smart contracts
capable for self-execution and self-enforcement, but the same also does not require any
intermediary. All the transactions are automatically documented in the database. Simply put,
these blockchain-based smart contracts are “decentralized smart contracts”, as a central
database/register is not required.

4
International Monetary Fund, Virtual Currencies and Beyond: Initial Considerations, (SDN/16/03)
<https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf>.
5
Nick Szabo, ‘Smart Contracts: Building Blocks for Digital Markets’ (1996) Extropy

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 2.3. IMPACT ON INTERNATIONAL TRADE AND COMMERCE

International Trade and commerce are not untouched by such innovative technologies.
Moreover, it is predicted that many legal reforms and financial policies would have to be
reformed for accommodating the concept as because; Firstly, due to its construct, blockchain
technologies’ usage allow for noteworthy cost savings. Secondly, many companies have
already opened up and have started accepting virtual currencies in their transaction all over
the world and lastly, what legislative or administrative consequences it would have if instead
of paper contracts, a few businesses and major corporate constructs start to use smart
contracts?
Furthermore, what is simply alluring is the fact that smart contracts are enforced on a daily
basis without requiring a necessary presence for any third party,6 thus lessening the
transactional costs enormously.
In different words, knowing that conventional currencies entail a fundamental scheme of
administration/central registry and that the digital currencies do not, having a decentralized
character in addition to being self-executed by a software. Hence, in view of smart contracts it
can easily be inferred that:
 There won’t be any necessary requirement for a vital third party to direct them, if they
are self-executed.
 Hypothetically, there is no means and methods of violating them.
A scenario can be envisaged in which two ventures, using a smart contract of a decentralized
nature, regulate their transactional mechanism in such a way that they are mechanically
executed using the cryptocurrency they have agreed upon. There are many platforms which
outline and use smart contracts in everyday life eg. Ethereum which is, “a decentralized
podium that runs smart contracts: requests that run exactly as involuntary without any leeway
of downtime, bowdlerization, fraud or third-party meddling. These apps run on a convention
built blockchain, an extremely commanding mutual global transportation that can move value
approximately and correspond to the possession of property. This facilitates developers to
produce souks, store registries of sum unpaid or promises, move funds in harmony with
directives given long in the past (like a will or a futures contract) and many other things that
have not been fantasy yet, all without a focus man or counterparty risk”.7

6
IMF Staff Discussion Note (n 1).
7
‘Ethereum: BLOCKCHAIN APP PLATFORM’<https://ethereum.org> accessed 11 September 2018

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Hence, the international traffic is likely to be will be affected by digital currencies. Whatever
be the case, the need of the hour is of a study-and-watch understanding which has to be ready
if such novelty comes in international trade. International Settlements while taking a quite
similar stance, has expressed that “virtual currencies and distributed ledgers are an
improvement that could have an array of impacts on many areas, particularly on payment
systems and services. These collisions could include the disruption of breathing business
replicas and systems, as well as the appearance of new financial, economic and societal
interactions and linkages”8. It has also stated that the “central banks could consider – as a
probable policy response to these progress – investigating the likely uses of distributed
ledgers in payment organizations or other types of FMIs”9. It is applicable similarly to other
international as well as municipal institutions, organization and Legislatures. The IMF for
example has also come up with some legislative construct which could persuade Nation States
to ask their administrative and legal constructs for further developing their regulatory
approaches to virtual currencies.10

8
Bank of Int. Settlements (BIS), CPMI report on digital currencies, (Nov. 2015)
<//www.bis.org/cpmi/publ/d137.pdf> accessed 4 December, 2018
9
ibid.
10
IMF Staff Discussion Note (n 4) 35.

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3. FUNCTIONAL BARRIERS IN MAKING CRYPTOCURRENCY A STANDARD
FORM OF EXCHANGE

It is not unknown that the position of most of the commercial virtual currencies as a
‘currency’ have been rejected by most local jurisdictions all over the world.11 Countries
including major economic powers like Brazil and China have warned their citizens of the
associated risks in virtual currency trading. The Reserve Bank of India too has issued similar
notice and has said that once a mined Bitcoin is traded, then the transfer of such may escape
the capital gains tax regulations if it is treated as an asset which is self-acquired and tangible
in nature.12 Virtual currencies are also not covered in the exceptions which regulate the sale in
special transactions of self-generated assets in countries which have characterized them as
assets such as Singapore, Canada and Norway. Payments to Contractors and Sub-Contractors
which is sometimes only partially considered as incomes and profits in recipient’s hand, may
escape mandatory obligation, where Bitcoin is considered as an asset.13

A Rupee or a Dollar is a recognized legal tender which can pay off debts of any public or
private nature. For debt recovery, settlement or any other transaction the creditor is bound to
accept the tender. Generally, tax payments require a person to use the respective fiat currency.
Such government endorsed currency creates a strong demand for that currency. on the
contrary, virtual currencies are associated with complex machine programs which is out of
general public understanding and whose accountability is not associated with any specific
controlling entity marks it as an unsuitable vehicle of acquiring wealth.

However, from the perspective of cryptocurrency, the value of its tender raises some
questionable issues. The price value of Bitcoin for example, has been fluctuating since it came
into being in 2009. Its dollar exchange rate fluctuated from March to April 2013, while rising
from $50 to $350 before coming back again to 70$. During the fall of the same year, it saw a
sharp rise to $1100 and came down to $200 during January 2015. This erratic price pattern is
found mostly in a commodity and is not expected from any currency. This shows that any
cryptocurrency’s market value is driven more by speculative investors and less by
institutional buyers, corporate houses or private merchants. Moreover, the major problem of

11
‘Monetarists Anonymous’ (The Economist, 29 September 2012)
<http://www.economist.com/node/21563752> accessed 11 November 2018
12
Sriram Govind, Samira Varansai, ‘Are bitcoins currency or asset?’ (Livemint, 5 February 2014)
<http://www.livemint.com/Money/3qcKrBcAMIisahVoyoygYK/Are-Bitcoin-currency-or-asset.html> accessed
19 December 2018
13
ibid.

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most of the blockchain based tenders such as Bitcoin is that it that it incentivises storage of
currency rather than spending of it which is contrary to what makes any currency a successful
and able medium of exchange.14 The virtual currency market is dominated by such
speculation as its value cannot be attached to any ‘fundamental’ like amount of any physical
commodity (gold) or presumed stability of an economy.

As, it has been already discussed that the number and amount of virtual currencies mined are
limited, it is expected that the demand for such would out rightly increase than supply causing
the price to increase. This would subsequently lead to deflation as the bitcoin cost of
merchandise and trades would tumble which would go on to incentivise its storage thus
causing a drastic fall in the current number of transactions.15

Last but not the least, the network security of virtual currencies is uncertain. It has to be
understood that though purported counterfeit is impossible, yet bitcoin-based exchanges and
wallet services providing platforms always had issues regarding security and has struggled
with the same. Even though normal e-commerce websites based on traditional payment
system too had security problems, high number of security-oriented issues related to a
currency which is still in its nascent stage damages its goodwill and creates mistrust. Some of
such instances which surfaced into headlines are:

 A loss of 19,000 bitcoins valuing over $5million was reported in a security breach in
BitStamp, an established European exchange in January, 2015.16

 A full denial of services attack was mounted by unknown hackers on Mt. Gox which
happened to be the most popular bitcoin exchange was declared bankrupt.
Approximately, 850,000 bitcoins valuing more than $400 million were stolen.17

 A small operation going with the name ‘Bitcoin Savings and Trusts’ was suddenly
closed down by its proprietor in August 2012, thus leaving $5.6 million in debts based
on Bitcoins out of the purview of recovery.18

14
Felix Salmon, ‘The Bitcoin Bubble and the Future of Currency’ (Medium, 3 April 2013)
<https://medium.com/money-banking/2b5ef79482cb> accessed 13 November 2018
15
Dan Kervick, ‘Bitcoin’s Deflationary Weirdness’ (New Economic Perspectives, 24 April 2 2013)
<http://neweconomicperspectives.org/2013/04/talking-bitcoin.html> accessed 9 December 2018
16
Mariella Moon, ‘Bitcoin Exchange Loses $5 Million in Security Breach’ (Engadget, 1 June 1 2015)
<http://www.engadget.com/2015/01/06/bitstamp-bitcoin-exchange-hack> accessed 12 November 2018
17
Mitt Clinch, ‘Bitcoin Hacked: Price Stumbles After Buying Frenzy’ (CNBC, 4 April 2013)
<http://www.cnbc.com/id/100615508> accessed 14 November 2018

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  Bitfloor, a similar exchange on September 2012 experienced a similar data breach and
24,000 Bitcoins with a value esteeming $250,000 were pilfered leaving the
organization briefly suspended.19

18
Adriianne Jeffries, ‘Suspected Multi-Million Dollar Bitcoin Pyramid Scheme Shuts Down, Investors Revolt’
(The Verge, 27 August 2012), <http://www.theverge.com/2012/8/27/3271637/bitcoin-savings-trust-
pyramidscheme-shuts-down> accessed 14 November 2019
19
Vitalik Burterin, ‘Bitfloor Hacked, $250,000 Missing’ (Bitcoin Magazine, 4 December 2012)
<http://bitcoinmagazine.com/2139/bitfloor-hacked-250000-missing> accessed 12 November 2019

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 4. CRYPTOCURRENCY ON THE WHETSTONE OF INDIAN LEGAL SYSTEM

Indian monetary policy governing entities and relative legal constructs have by and large
discouraged the use of virtual currencies. RBI in its statement has warned that investments
made via virtual currencies can pose severe operational, financial and security related risks as
they have the looks of Ponzi schemes.20. On similar lines it has debarred all entities viz.
Banks, NBFCs, etc. from trading in cryptocurrencies or facilitating any entity or any person
dealing with the same.21 Government bodies like the Income Tax Department22, Ministry of
Corporate Affairs23, have also put their concurring views regarding virtual currencies to.

At its fundamental level, it is important to understand that virtual currencies are a progression
of computer language codes which are encrypted and don’t have any tangible form
whatsoever. Moreover, there is no way it can possibly be converted into any physical form as
well. But it is also to be noted at the same time that, virtual currencies do find coherence with
certain properties of known concepts of Property, security, commodity and currency. Hence
in this part we would analyse and test the nature of cryptocurrencies on the whetstone of these
legally established concepts.

4.1. VIRTUAL CURRENCY AS EITHER A CURRENCY OR A VALID LEGAL TENDER

According to the Indian Constitution, issuance and regulations related to currency fall
exclusively under Union List. Subsequently, in order to qualify as a legal tender or currency,
its issuance has to be according to legislations governing the same which in present case is the
Coinage Act, 1906 and the Reserve Bank of India Act, 1934. It could also be done vide any
notification by the Union Government or by any exclusive official directive recognising it.

In the present scenario, virtual currencies are issued in a manner which apart from falling
outside the legal framework of any Country is not also supported by any State authority. They
are spawned by solving encrypted mathematical problems by using a computer’s

20
Press Release, Reserve Bank of India, RBI cautions users of Virtual Currencies against Risks (Dec. 24, 2014),
https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247.
21
Circular, Reserve Bank of India, Prohibition on dealing in Virtual Currencies (VCs) (Apr. 6, 2018),
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI15465B741A10B0E45E896C62A9C83AB938F.pdf.
22
Rupam Jain, Manoj Kumar, ‘India sends tax notices to cryptocurrency investors as trading hits $3.5 billion’
(Reuters,19 January 2018) <https://in.reuters.com/article/us-markets-bitcoin-india-taxes/india-sends-tax-notices-
to-cryptocurrency-investors-as-trading-hits-3-5-billion-idINKBN1F8190> accessed 19 November 2018)
23
Shivani Pandita, Cryptocurrency exchanges forbidden from registering under Companies Act, 2013 by ROC
(Knowstartup, 23 January 2018) <http://knowstartup.com/2018/01/cryptocurrency-forbidden-roc/> accessed 15
November 2018

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computational power, hence in order to solve them, instead of human input; a pre-set
quantified amount of computational power and time is required. Hence, they don’t have any
inherent value neither is there any kind of definite value due to lack of backing by any
governmental authority. Thus, as expected and seen, their value is quite volatile and
superficial. Thus, functionally, crypto-currencies are neither fiat currencies nor a valid legal
tender.

4.2. VIRTUAL CURRENCY AS A PROPERTY OR GOODS

As it has already been explained above, virtual currencies are just a set of computer code,
without any tangible form hence the moot question is that whether it can come under the
purview of moveable property or not. Surprisingly, the Transfer of Property Act, 1882 does
not explicitly provide any substantial light on moveable property however, the same can be
sought out from the Section 3(36) of the General Clauses Act, 1897, which clearly elucidates
that,

"moveable property" shall mean property of every description, except immovable

property.”24

In conjunction to the above explanation which is wide enough for including property of
intangible nature as well, the classification of ‘goods’ can also be found out under the Section
2(7) of the Sale of Goods Act, 1930 which states that,

"goods means every kind of movable property other than actionable claims and
money; and includes stock and shares, growing crops, grass, and things attached to or
forming part of the land which are agreed to be severed before sale or under the
contract of sale"25

Given the feasibility of legislation, the authors are of the view that virtual currencies are good
being a moveable property. However, there are no major decisions regarding digital assets or
intangible property rights. However, in the view taken by the Hon’ble Supreme Court in the
landmark decision of Tata Consultancy Services v. State of Andhra Pradesh,26 it has been
stated that.

24
General Clauses Act 1867, s 3(36).
25
Sales of Goods Act 1930, s 2(7).
26
Tata Consultancy Services v.State of Andhra Pradesh AIR 2005 SC 371.

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 "Indian law does not make any distinction between tangible property and intangible
property. A 'goods' may be a tangible property or an intangible one. It would become
goods provided it has the attributes thereof having regard to

(a) its utility;

(b) capable of being bought and sold; and

(c) capable of transmitted, transferred, delivered, stored and possessed.

(d) If a software whether customized or non-customized satisfies these attributes, the

same would be goods.”27

Virtual Currency such as Bitcoin and Ether have the capability of being traded in exchange of
goods and services by a strong utility base along with being easily stored, transmitted or
possessed using platforms such as Ethereum or Unocoin. Added with the crystallized legal
position which regards ‘goods’ can be intangible as well, we can safely assume that crypto-
currencies as intangible property rights under Indian Legal Context.

4.3. VIRTUAL CURRENCY AS A SECURITY

Section 2(h) of the Securities Contracts (Regulation) Act, 1956 defines ‘Security’ as

"securities to include:

i. 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;

a. derivative;

b. units or any other instrument issued by any collective investment

scheme to the investors in such schemes;

c. security receipt as defined in clause (zg) of section 2 of the

Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2oo2;

d. units or any other such instrument issued to the investors under any
mutual fund scheme;
27
ibid.

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 ii. Government securities

iii. Such other instruments as may be declared by the Central Government to be

securities;

iv. Rights or interest in securities."

From this definition it can easily be perceived that all the instruments that are present in this
list have a common attribute of having a latent capital asset. However, virtual currency
doesn’t have any such underlying asset. The second point of dissonance is that as per the
SCRA definition, security is ‘issued’ thus bringing in the picture entities like ‘issuer’ and an
‘allottee’. But as we know virtual currency such as bitcoin are not ‘issued’ by any corpus but
are spawned when encrypted mathematical problem given by the software are solved by
applying computing power and time. Although we know that virtual currencies are traded in
crypto-currency exchanges all over world similar to the trade of securities such as stocks and
shares yet they fail to satisfy the aforementioned criteria under the SCRA.

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 5. CRYPTOCURRENCY AND INDIAN TAXATION: A CROSSOVER

Article 246 of the Indian Constitution gives power to both the Parliament and the State
Legislature to impose taxes28. The one Hundred and First Amendment Act, 2016 passed by
the parliament made several amendments in regards to the imposition of Goods and Services
Tax. This included the insertion of Article 246A, by way of which exclusive power of making
laws has been conferred to the Parliament regarding interstate trade and commerce.29

Keeping cryptocurrency in the view, a transaction made can be viewed from two perspectives;
income and expenditure. Thus, on the basis of nature and parties involved in the transaction,
the same can either be taxed under the head of Income Tax Act, 1961 (hereinafter referred as
ITA) or under the head of Goods and Services Tax Act, 2017 (hereinafter referred as GST).
Since the regulatory construct regarding virtual currencies are ambiguous, this part tries to
analyse the taxation or the omission of taxation by considering them either as a good or as a
currency

5.1. UNDER THE INDIRECT TAX

With the implementation of GST India now subsumes Indirect Tax, leaving a few. There are
two means by which bitcoins can be obtained one of them being that they are mined, or the
other option being that they are purchased through exchanges. The problem is that, if the
bitcoin is classified as money, then they can’t be taxed. So, we need to resort to a structure
which would qualify it as indirect tax. The supply of bitcoin would be treated as a “taxable
supply” and that would look like more of transaction of barter system as this would involve
exchange of goods or some other thing in exchange of bitcoins. We need to develop a
technology wherein the transaction would be under section 2(h) of Sales of Goods Act, 1930.
However, after GST was implemented the issue has no longer in debate as it is already known
that GST makes even a transaction under the barter system as taxable so even if bitcoin
trading becomes a part of barter system still it won’t be tax exempted and can be source of
revenue for the government. After this there will be three conditions that will take place in
this scenario:

 The transaction involving the transaction where there is exchange of currencies.

 Where there is exchange by good and services with virtual currencies.

28
Constitution of India, Article 246(2).
29
Constitution of India, Article 264A (2).

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  When currencies are exchanged by good and services through intermediary.

It is known to us that cryptocurrency has evolved with time so when we discuss so to how we
will be able to tax them then we need to assume a situation where the transaction is taking
place in India and is also coming under the definition of being taxed under the new GST. So if
there is an exchange of money for consideration then it would be termed as a consideration
wand would be taxed anyhow.

Also, if they are exchanged with good and services its transaction value will be charged by
GST. In that case suppose there is one person who purchases a thing in return of 20 bitcoins
then the value of those 20 bitcoins will be charged at that moment. In this case if the value of
the coins is higher at present value then GST will be charged at that value only

In the last condition when there is agent between the person who is providing the goods and
services and the second who is providing bitcoin. In this case there are two different
transaction taking place. one which is between the supplier and the giver and the second
contract between the buyer and the agent, so in total both these transactions would fall
between the definition of taxable commodity given under the GST.

To conclude there are problem with respect to involving GST with virtual currencies and also
double taxation but all could be solved once there are proper policies in place and they are
regulated properly.

5.2. UNDER THE DIRECT TAX

If cryptocurrency is seen as a ‘currency’, then it will easily come under the purview of ITA.
This is so because firstly, the definition of ‘income’ not only encompasses the ‘natural’
understanding but also includes those mentioned in Sec. 2(24) of the Act.30 However, neither
the Sec. 2(24) of the Act nor the natural meaning talks anything about ‘money or ‘currency’
per se. Moreover, being a mode of transaction, the instances of tax would not be on the
currency but on the transaction.

If, however virtual currencies are treated as goods or property, then either it is possible that
they would need be covered inside the ambit of ‘'Profit and Gains from Business and
Profession’31or within the meaning of ‘'Income from Capital Gains’32 considering the fact that

30
Commissioner of Income Tax v. P.R.S. Oberoi, (1990) 183 ITR 103 (Cal.).
31
Income Tax Act, 1961, s 28.
32
ibid.

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whether business/profession has been done using virtual currency or not. It is important to ot
that unless expressly exempted by the ITA the word ‘income’ would extend to ‘profits’ and
‘gains.33

5.2.1. IF TREATED AS ‘CAPITAL GAINS’

According to Sec. 2(14) of the ITA, capital asset is “any kind of property of the assessee
irrespective of whether it is connected with his or her business or not”34. It doesn’t take into
account, the movable property of assessee’s person where there exists an intimate connection
between him and his movable property35. This meaning of ‘capital asset’ is wide enough to
cover all types of property unless if anything has been specifically exempted.36Hence if any
profit is generated through transfer of cryptocurrency then that would be included under
‘capital gains’. Consequently, under the Long-Term Capital Gains the period of holding
becomes taxable if it the transaction is for more than thirty-six months.37 At the same time in
case the transaction period is less than thirty-six months, then the provisions under Short
Term Capital Gains is attracted. In either instance, the acquisition cost will actually be the
market value at the time when it was being purchased or created and if there is any surplus
then the same would be subject to taxation under the Sec. 45.

However, when we consider cryptocurrencies as capital assets, the problem comes up while
ascertaining the ‘cost of acquisition’ at the time when they are being mined. Added to the fact
that the computer of the miner is the only input that a miner employs and that
cryptocurrencies like Bitcoins are a ‘self-generated asset’ which are created by the system as
an incentive for the verification of transactions, therefore the cost of acquisition can’t
precisely be ascertained. The Hon’ble Supreme Court however while deciding the case of
Commissioner of Income-tax v. B.C. Srinivasa Shetty was of the opinion that in cases where
the cost of acquisition can’t be made out and is ‘indeterminable’, the capital gains won’t be
chargeable.38 Hence there is a possibility that profits from bitcoin and like cryptocurrencies
get exemption from taxation liability.

5.2.2. IF TREATED AS ‘PROFIT AND GAINS FROM BUSINESS AND PROFESSION’

33
Maharaj Kumar Gopal Saran Narain Singh v. CIT, (1934-35) 62 IA 207 (PC).
34
ITA 1961, s 2(14).
35
Assistant Commissioner of Income-tax v. Faiz Murtaza Ali, (2012) 6 TMI 41.
36
Commissioner of Income Tax v. B.C. Srinivasa Shetty, (1981) 2 SCC 460.
37
ITA 1961, s 112.
38
Commissioner of Income-Tax v. B.C. Srinivasa Shetty, (1981) 2 SCC 460.

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The Clause 13 of the Section 2 of the Income Tax Act, 1961 defines ‘business’ and includes
in its ambit any “trade, commerce or manufacture or any adventure or concern of such
nature.”39 Hence it is understandable that any long run activity related to trade in
cryptocurrency would be would be subject to taxation under the Sec. 28 of the Act.40 Even if
the profits are not in money still it would be taxable as they would be ‘in kind’. Moreover,
expenditure incurred for fulfilling the trade objective like the purchasing of computational
power as a capital asset would be subject to tax deduction according to the procedures laid
down from Sec. 30 to Sec. 43(d) of the ITA.

Although there is no crystallized judicial structure regarding the legality of cryptocurrency in

India,41such illegality would not be having any bearing on its taxability.42 As it is known that
income tax does not make a difference between illegal and legal income, thus even if such
illegality is imposed, it would still come under the taxation laws.

39
ITA 1961, s 2(13).
40
ITA 1961, S 28.
41
Yuthika Bhargava, ’Bitcoin — To Ban or Not To’ (The Hindu, 13 July
2017)<http://www.thehindu.com/todayspaper/tp-national/bitcoin-affords-anonymity-in-grey-
area/article19267696.ece> accessed 14 December 2019
42
Commissioner of Income Tax v. K. Thangamani, (2009) 309 ITR 15.

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 6. CRYPTOCURRENCY IN PURVIEW OF GST ACT, 2016

With cryptocurrency prices soaring over the last few years, many Indians have raked in
instant wealth. But paying taxes on this income has turned into a nightmare This is so because
under Indian tax laws, the nature of virtual currency investments is unclear. What is certain is
there’s no escaping taxes. In December 2017, the income tax (I-T) department surveyed
several cryptocurrency exchanges in the country to understand their modus operandi and user
base. Since then, notices have reportedly been served to about 500,000 investors for non-
payment of taxes. In the past few months, the bourses, too, have appeared on the Reserve
Bank of India’ and the government’s radar.

The RBI has forbidden banks from dealing with these exchanges and investors in any fashion,
while a panel formed by the Narendra Modi government is working on draft regulations for
digital currencies. In such volatile times, the exchanges themselves have been urging
customers to not skip paying taxes.

6.1. FOR TRADERS

For a trader, earnings from virtual currencies are treated as income from business. “Under
this, certain expenses related to business, office maintenance, such as buying a computer,
internet expenses, office rent, administration cost, etc., can be deducted,” explained another
financial planner, requesting anonymity. “Then, on the remaining amount, tax will be
applicable as per the slab.” If you are a trader and your turnover crosses the Rs 2 crore mark,
you need to go for a tax audit by a chartered accountant. Another key issue is choosing the
right form to file returns. “Depending on whether an individual is treating it as capital gains or
income from other sources or business, ITR2 or ITR3 must be picked,”

6.2. INDIVIDUAL INVESTORS

As the tax treatment of cryptocurrency continues to be in the grey zone, it is open to

interpretation, warn chartered accountants (CAs). “In case of gains, you have to state profits
or capital gains made by you from transaction in cryptocurrencies year-wise with statements
showing the workings,” read the tax notice sent by the I-T department to investors in the last
few months. As a result, most chartered CAs are inclined to treat these investments as capital
gains tax.

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The premise of capital gains is that an investment will be held for a certain period of time so
that its value appreciates. These taxes are divided into short-term and long-term.

In case of a short-term gain, the amount is added to the income and taxed according to the tax
slab that an individual falls under. For instance, anyone who earns over Rs10 lakh ($14,614)
will be taxed at 30%.

If it falls under the long-term category, it will be taxed at 20%. The tax rate can go down
further once indexation benefit is applied, which allows one to adjust for inflation during the
period these investments were held. Every year, the Central Board of Direct Taxes releases
the cost inflation on which these assessments are done

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