Some persons may not know about cryptocurrency but everyone has heard about BITCOIN, isn’t it? Ever since the Bitcoin price soar to as high as Rs.13.50 Lakhs on Indian bourses back in January 2018, bitcoin has become the topic of discussion of the town. Well, Bitcoin is the first cryptocurrency created in the year 2009 and thereafter many other cryptocurrencies followed.
Through this article you will get an understanding of cryptocurrencies, general idea of how cryptocurrency exchange works, growth in this sector and most importantly tax implications on its trading.
What is Cryptocurrency?
Some say it’s the way of future. Some say it’s just a scam. Others call it magic internet money. Well, let us understand what exactly cryptocurrency is and why is it taking the world by storm. Going by the most basic definition, cryptocurrency is a medium of exchange. They are a means of carrying out a transaction digitally. They are virtual currencies completely independent of the government control or any central authority or regulatory body.
Now you would be wondering that if there is no central authority to run the system then how are the transactions maintained and verified. How are cryptocurrencies valued? How does cryptocurrency work?
The answer to the above questions is the use of cryptography technology to provide security and verify the transactions. A blockchain is a public ledger for all cryptocurrencies transactions. The cryptocurrencies are exchanged through a worldwide peer-to-peer network and are recorded on the blockchain.
Some of the top cryptocurrency are Bitcoin (being the first virtual currency), Ethereum, Ripple, Litecoin, etc.
How is Cryptocurrency Traded?
Cryptocurrencies are traded through crypto exchanges. These exchanges are similar to the physical currency exchanges. The simple steps to be followed to buy or sell cryptocurrencies on any crypto exchange are as follows:
-Open your account with any crypto exchange by submitting your documents
-The account will be linked to your registered bank account
-Whenever you buy any cryptocurrency, it will be stored in your e-wallet provided by the exchange and requisite amount will be deducted from your registered bank account.
-Likewise, you can even sell the cryptocurrency stored in your e-wallet.
Growth in Cryptocurrency Sector
You still think that Cryptocurrency isn’t a good deal?
Let’s have a look at what The Cambridge Centre for Alternative Finance, in their inaugural research in GLOBAL CRYPTOCURRENCY BENCHMARKING STUDY led by Dr. Garrick Hileman & Michel Rauchs has to say about it.
The current number of unique active users of cryptocurrency wallets is estimated to be between 2.9 million and 5.8 million and there are more than 500 crypto exchanges all over the world.
Smartereum, the news blog about blockchain and cryptocurrencies, have predicted that cryptocurrency market valuation will hit $1 trillion in the year 2018.
As far as India is concerned, the focus of the current Indian Government on the cashless economy, coupled with the demonetization drive is why India is poised to see more growth in cryptocurrencies over the short and long term. Given these circumstances, it is no wonder that Bitcoin, one of the first cryptocurrencies to hit the market, saw demand peak in India.
As per Cointelegraph, a London-based news site, one of India’s leading trade associations, ASSOCHAM, held a global summit on Bitcoin and Blockchain in March 2017, describing Bitcoin as a “revolution in the field of supply chain finance.”
Later, in May 2017, the demand for Bitcoin grew exponentially and abruptly, so much so that India’s largest exchanges had to put a limit on Bitcoin purchases due to lack of supply. A month later, in June, Zebpay became the 7th most popular app in the finance category on India’s Apple app store, even higher than the apps of many national banks. In October, it was reported that the major Bitcoin exchanges in India were adding more than 200,000 new users every month.
The year also saw the launch of two cryptocurrency Exchanges in India backed by major players, namely BitIndia, backed by John McAfee, and Coinome, backed by BillDesk.
While it is safe to predict that cryptocurrencies are here to stay, both in India and overseas, it is worthwhile pointing out that the same has resulted in several blockchain startups both in India as well as in other countries.
Taxation of Cryptocurrency
Cryptocurrencies are naturally complex in nature and at the same time, it has the capacity to become a one world currency. Being said that, one could imagine the potentials it possesses. The countries are grappling with cryptocurrencies and are finding a way to deal with them.
In India, cryptocurrencies fall outside the purview of current regulations governing currencies and legal tender. This surely does not mean that cryptocurrencies are illegal. It simply means that they are unregulated and therefore outside the definition of currency or capital asset and thereby the law that governs them. A proper regulatory framework would be required to regularize these complex crypto assets.
GST on Cryptocurrency?
Recently, the Indian Government has come up with the idea of levying Goods and Services Tax (GST) on cryptocurrency trading.
However, before levying any GST on cryptocurrency trading or mining or any ancillary activities, the Government would need to regularize these crypto assets.
As per the report of BloombergQuint, news organization, India may levy GST on different segments of cryptocurrency sector. As per the report, the proposal is being prepared by the Central Board of Indirect Taxes and Customs and will be placed before the GST Council.
The key points of the proposal are discussed as follows:
1. The cryptocurrency will be classified as ‘intangible goods’ which will be treated similar to any software.
2. Trading of cryptocurrencies, that is, purchase and sale of cryptocurrencies will be considered as supply of goods. The activities facilitating such trading transactions will be considered as supply of services. For example, a crypto exchange facilitating trading transactions between buyers and sellers, charges commission or fees. GST will be applicable on such commission or fees as supply of services.
3. Value of cryptocurrency will be based on the transaction value in Indian Rupees or any other equivalent convertible foreign currency. For example, a person is buying 1 Bitcoin for Rs.500000 or $7000, as the case may be, then the taxable value would be Rs.500000 or $7000 converted to equivalent Indian rupees, respectively.
4. If buyers and sellers, both are in India, the transaction would be treated as a supply of software and the buyer’s location will be the place of supply since GST is a destination based tax. Suppose, a person in Maharashtra buys cryptocurrency form a person in Gujarat, then the place of supply would be Maharashtra and such cryptocurrency would be treated as transfer of software.
5. For transfer and sale of cryptocurrencies, the location of the registered person will be the place of supply. This situation will arise if the supplier is non-registered person and the buyer is registered person, in which case the location of buyer will be the place of supply. However, when the sale is made to a non-registered person, the location of the supplier will be considered as a place of supply.
6. The cryptocurrency transactions outside India will attract Integrated Goods and Service Tax (IGST) and will be considered as imports or exports of goods.
Tax on Cryptocurrency Mining
Cryptocurrency mining is a process whereby the transactions are verified, maintained and stored on the blockchain. Mining will be treated as supply of service and miners will be required to pay GST on transaction fees or rewards they charge from the clients for mining cryptocurrencies. However, it is extremely important to understand that when a miner generates the cryptocurrency for himself, such cryptocurrency would be considered similar to self-generated goodwill and hence would not be liable to GST. Only when the miner sells such crypto assets, GST liability would arise.
Crypto Exchanges and Wallets
Crypto exchanges would be required to pay GST on the commission or fees charged by them from clients. They will be required to register under the GST Act.
Cryptocurrency wallets are digital wallets where cryptocurrencies are stored. Wallet service providers will also be required to register under the GST Act.
As per BloombergQuint report, the government may levy GST on cryptocurrency trading retrospectively from July 1, 2017, the date when GST first rolled out in India. However, the government is yet to take final decision on the same.
As reported, virtual currencies did a monthly business of Rs.200 crore, if the government taxes such income at 18% for 10 months from July 2017 to April 2018, the government can earn the revenue of Rs.360 crore in GST, which is a very huge amount.
It would be apt if the Government takes the decision at the earliest; otherwise recovery would be a difficult task.
The proposal of levying GST on cryptocurrency trading is still at its development stage and has not been placed before GST Council. The government has not made any official announcement yet. However, we can expect that the government will take the final decision within next 1 or 2 months.
Impact of 18% GST on Cryptocurrency Business in India
- The buyer of cryptocurrency, in peer-to-peer network, where the buyer directly purchases cryptocurrency from a person (seller) without involvement of any crypto exchange, will be required to pay extra 18% GST on the value of transaction to the seller.
- Where a cryptocurrency exchange is involved, the cryptocurrency traders (both, buyers and sellers) will need to pay extra 18% GST on brokerage charged by such exchange per trade transaction.
- It is important to note that while levying GST on cryptocurrency trading, ‘cryptocurrency’ is treated as ‘goods’ and not as a ‘currency’ or ‘consideration’ for any goods or services. The consumers who use cryptocurrency as a payment or as a consideration to buy goods or services will have to bear GST twice, once when they purchase cryptocurrency and secondly when they buy any goods or services by using such cryptocurrency as a mode of payment.
- Even though the prices of the cryptocurrency in the Indian market will rise due to regularization of these crypto assets, 18% GST will discourage Indians to trade in cryptocurrency unless a lower GST rate is pronounced by the Government.
We at Afleo provide various legal services for Start-ups registrations. Our services include Annual Filings for a Company, LLP and OPC. We believe in encouraging newer ideas and we make sure we be a part of those ideas and turn them into reality. Hope the article above was helpful in providing you the correct information.