GST AND INCOME TAX ON CRYPTOCURRENCIES

What is Crypto currency?

Crypto currency is a virtual or digital representation of money’s worth. Crypto currency is a digital currency that can be exchanged online for goods and services, but uses an online ledger with strong cryptography to secure online transactions. Crypto currency work using a technology called Block chain.

A crypto currency is defined as “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

Who verify the Crypto Transactions?

It is method by which the transactions are verified on a block chain where an algorithm provides a mathematical problem and different computers race to solve it whole process is called mining and Computer used for mining is called as Miners. Miners receive new crypto currency as a reward in return for validation of crypto transactions (Mining).

Whether Crypto currency is Ban in India?

In 2018 the RBI has banned banks and other regulated entities from supporting Crypto transactions after digital currencies were used for frauds but there is no law prohibiting Indians from buying/selling crypto currencies in India.

In year 2020 the Supreme Court of India in the case of Internet and Mobile Association of India vs. RBI quashed RBI Circular banning banks to provide facility to crypto exchanges. Hence, currently dealing in crypto currencies in India is not illegal.

Applicability of GST on Crypto currency?

The taxable event in GST is supply of goods or services or both. “Services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Whether Crypto currency is money?

As Per Section 2(75) of CGST ACT 2017 define money as “money” means 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.

From the above definitions it can be understood that any foreign currency will be considered as money under the CGST Act 2017.

Now, it becomes essential to understand that whether Crypto currencies are foreign Currency?

As the term ‘foreign currency’ is not defined under CGST Act, thus we need to check other laws. FEMA Act defines “foreign currency” which means any currency other than Indian currency.

Therefore, it can be concluded from above definition that crypto currencies can be treated as foreign currency only if Crypto currencies is covered under the ambit of the term ‘currency’.

The term ‘Currency’ has been defined in Section 2(h) of the FEMA as follows: “Currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory notes, credit cards or other similar instruments, as may be notified by the Reserve Bank;

Hence, for any instrument to be considered as currency it is essential that the same has to be notified by Reserve Bank of India (RBI). Thus, as bit coins are not recognised by RBI in India, therefore the same cannot be considered as currency.

Hence GST is applicable on dealing in Crypto currency as a results buying and selling of crypto currencies will be considered under the category of supply of goods.

Since there is no specific rate applicable to crypto currencies under GST hence general rate which is 18% is applicable on Crypto currencies.

The Central Economic Intelligence Bureau (CEIB) has put forward a proposal to impose 18% GST on bit coin transactions. As of now, there is an absence of any kind of regulatory for crypto currency.

Hence there is every possibility of large amount money laundering. However, the CEIB has suggested to the finance ministry that bit coin might be categorized under the ‘intangible assets’ class and GST could be imposed on all transactions.

Applicability of Income Tax on Crypto currency?

Income Tax in case of dealing in Crypto currency depends upon transactions frequency/substantial transactions in Crypto.

In case transactions of substantial in nature income is to be assessed as business income and liable for 30% taxation in general.

Crypto currency can be held as capital assets if they are purchased for the purpose of investments by taxpayers. Any gain arising on transfer of a crypto currency shall be taxable as capital gains. If holding period is below 36 month it will be treated as short term capital assets and if period of holding is more than 36 month it is to be treated as long term capital assets.

Taxpayer can also shows income from Crypto currency as Income from other sources if transactions are not substantial.