Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

Legality & Legitimacy of Cryptocurrencies in India

but

  • For public bodies, and notably the government, everything which is not allowed is forbidden.
  • There is no law in India that deals with the legitimacy and legality of cryptocurrencies/NFTs in India.
  • Mere inclusion or bringing cryptocurrencies/NFTs within the tax net by amending the Indian Income Tax Act does not provide or deal with the legitimacy and legality of cryptocurrencies/NFTs in India.
  • Taxability of illegal money earned has nothing to do with the legitimacy of the means of earning.
  • Since cryptocurrencies/NFTs have not been declared illegal, the same will fall into the category of legal.

Definition of Cryptocurrencies – Virtual Digital Assets in India

Virtual Digital Assets have been defined for the first time in the year 2022 in India under Section 2(47A) of the Income Tax Act, 1961

Ref: https://www.indiabudget.gov.in/doc/Finance_Bill.pdf

And

https://www.indiabudget.gov.in/doc/memo.pdf

Definition Virtual Digital Asset

"Virtual Digital Asset" means—

Any

  • information or
  • code or
  • number or
  • token
  • (not being Indian currency or foreign currency),
    • the expressions "currency", "foreign currency" and "Indian currency" shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).]

generated through

  • cryptographic means or
  • otherwise,
  • by whatever name called, providing
  • a digital representation of value exchanged
    • with or
    • without consideration,
  • with the
    • promise or
    • representation of
  • having inherent value, or
  • functions
  • as a store of value or
  • a unit of account
  • including its use in any financial transaction or investment, but not limited to investment scheme; and

can be

  • transferred,
  • stored or
  • traded

"Virtual Digital Assets" include

  • a non-fungible token (NFT) or
  • any other token of similar nature,
    • by whatever name called;
    • "non-fungible token" means such digital asset as the Central Government may, by notification in the Official Gazette, specify.
  • any other digital asset,
    • as the Central Government may, by notification in the Official Gazette specify.
    • Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of the virtual digital asset subject to such conditions as may be specified therein.

Virtual Digital Assets & Cryptocurrencies as Property

  • Section 56(2)(X) includes 'Virtual Digital Asset' within the definition of 'Property'.

Indian Legislation(s)- On Indian Legislations-Impact – Cryptocurrencies Impact

  • At the moment, there is no specific law that classifies virtual currencies as a good, service, security, commodity, derivatives or currency.
  • For the first time Section 56(2)(X) of the Income Tax Act has defined 'Virtual Digital Asset', and includes it within the definition of 'Property' i.e. movable properties.
  • Some of the laws which have a direct bearing on the legal aspects relating to illegal Virtual Currencies like Bitcoins, are as under:
    1. The Constitution of India, 1950;
    2. Reserve Bank of India Act, 1934,
    3. The Foreign Exchange Management Act, 1999 ("FEMA");
    4. The Reserve Bank of India Act, 1934 ("RBI Act");
    5. The Coinage Act, 1906 ("Coinage Act");
    6. The Securities Contracts (Regulation) Act, 1956 ("SCRA");
    7. The Sale of Goods Act, 1930 ("Sale of Goods Act");
    8. The Payment and Settlement Systems Act, 2007 ("Payment Act").
    9. Indian Contract Act, 1872 ("Contract Act").

Section 115BBH
Income Tax Act

Taxed How?
Rate etc.

Where the total income of an assessee

  • includes any income from the transfer of any virtual digital asset,
  • the income-tax* payable shall be the aggregate of-
    • the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of Thirty per cent (30%);

AND

  • the amount of income tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).

*Income tax is levied on the income earned by all the individuals, HUF, partnership firms , LLPs and Corporates as per the Income tax Act of India. In the case of individuals, tax is levied as per the slab system if their income is above the minimum threshold limit (known as basic exemption limit )

Section 115BBH
Income Tax Act

Taxed How?
Rate etc.

Deductions & Calculation

Notwithstanding anything contained in any other provision of the Income Tax Act,––

  • no deduction in respect of any expenditure
    • (other than the cost of acquisition) or
    • allowance or
    • set off of any loss
  • shall be allowed
    • to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1);

AND

  • no set-off of loss from transfer of the virtual digital asset
  • computed under clause (a) of sub-section (1) shall be allowed against income computed under any other
    • provision of this Act
    • to the assessee and
  • such loss shall not be allowed to be carried forward to succeeding assessment years.

Section
194S
Income Tax Act

TDS

Payment on transfer of virtual digital asset

  • Any person responsible for paying to a resident any sum
  • by way of consideration
  • for transfer of a virtual digital asset, shall,
    • at the time of credit of such sum to the account of the resident or
    • at the time of payment of such sum by any mode, whichever is earlier,
  • deduct an amount equal to one per cent (1%) of such sum as income-tax thereon
  • Provided that in a case where the consideration for transfer of virtual digital asset is-
    • wholly in kind or in exchange of another virtual digital asset, where there is no part in cash; or
    • partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer,
    • the person responsible for paying such consideration shall, before releasing the consideration,
      • ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset.
    • This Section is applicable to both cash and barter transactions.
    • This Section also applies to exchanges as well as individuals.

Section
194S
Income Tax Act

No Deduction of TDS

  • No tax shall be deducted in a case, where--
  • the consideration is payable by a specified person and the value or aggregate value of such consideration
    • does not exceed fifty thousand rupees
    • during the financial year;

OR

  • the consideration is payable by any person other than a specified person and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year.
  • No other deduction under any other provision of the Act.

TDS?

TDS is the collection of tax from the very source of income.

A person (deductor) who is liable to make payment of specified nature to any other person (deductee)

shall deduct tax at source and remit the same into the account of the Central Government.

The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted.

( https://www.incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx#:~:text=The%20concept%20of%20TDS%20was,account%20of%20the%20Central%20Government.)

Calculation of Income Tax Payable

Income (except the income from virtual digital assets/cryptocurrencies) on which tax is payable as per the provisions of the Income Tax Act

* Income from virtual digital assets/cryptocurrencies
On which income tax is payable at the rate of 30%

* Sale/transfer price of virtual digital asset/cryptocurrency

Less

Cost of acquisition of virtual digital asset/cryptocurrency

Less

(NOT ALLOWED:

  • no deduction in respect of any expenditure or
  • allowance or
  • set-off of loss from transfer (sale) of the virtual digital asset–cryptocurrency) in any manner.

= Income on which Tax is payable.

  • No carry forward of losses from transfer (sale) of the virtual digital asset–cryptocurrency) in any manner

Gift/Transfer of virtual digital assets/crypto currencies Without consideration
-
Tax implications

  • Tax payable as per provisions of section 56(2)(X) of the Income Tax Act
  • Where any property/ virtual digital assets/cryptocurrency, other than the immovable property is transferred
    • without any consideration
      • Example: Gift
    • the aggregate fair market value of which exceeds fifty thousand rupees,
    • the whole of the aggregate fair market value of such property.

OR

  • for a consideration which is less than the aggregate fair market value of the property
  • by an amount exceeding fifty thousand rupees,
  • the aggregate fair market value of such property as exceeds such consideration.

GST-Applicability on Cryptocurrencies

  • The taxable event in GST is supply of goods or services or both.
  • The term, "supply" has been inclusively defined in the Act.
  • Supply of goods or services or both(Supply of anything other than goods or services does not attract GST).
  • Supply should be made for consideration.
  • Supply should be made in the course or furtherance of business.
  • Supply should be a taxable supply.
  • "Goods"
    • has been defined as every kind of movable property
    • other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
  • "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.
  • Where certain activities or transactions constitute a supply in accordance with the provisions of section 7 (1) of the CGST Act, 2017, they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
  • Schedule III to the CGST Act, 2017 spells out activities which shall be treated as neither supply of goods nor supply of services.
  • Consideration has specifically been defined in the CGST Act, 2017. It can be in
    • money or

BARTER

  • When there is a barter of goods or services, the same activity constitutes supply as well as a consideration.

Consideration for Supply

  • It is immaterial whether the payment is made by
    • the recipient or
    • by any other person.
  • When there is a barter of goods or services, the same activity constitutes supply as well as a consideration.

Supply in the Course or Furtherance of Business

  • GST is essentially a tax only on commercial transactions. Hence only those supplies that are in the course or furtherance of business qualify as Supply under GST.
  • Any supplies made by an individual in his personal capacity do not come under the ambit of GST unless they fall within the definition of business as defined in the Act.
  • Supply by a Taxable Person
  • A supply, to attract GST, should be made by a taxable person.
  • Hence, a supply between two non-taxable persons does not constitute supply under GST.
    • A "taxable person" is a person who is registered or
    • liable to be registered under section 22 or section 24.
    • Hence, even an unregistered person who is liable to be registered is a taxable person.

Taxable Supply

  • For a supply to attract GST the supply must be taxable.
  • Taxable supply has been broadly defined and means any supply of goods or services or both which is leviable to tax under the Act.

https://www.cbic.gov.in/resources//htdocs-cbec/gst/The_Meaning_and_Scope_of_Supply_new.pdf

GST is payable on all Goods & Services

  • Any Goods which are not specified will attract GST which will become payable @ 18%
  • Any services which are not specified will also attract GST which will become payable @ 18%

Cryptocurrencies, NFTs which are treated as Virtual Digital Assets and included in the definition of Property under the provisions of the Income Tax Act will fall in the category of Goods, accordingly, GST (CGST & SGST) will become payable @ 18%

Similarly, EXCHANGES of Cryptocurrencies & NFTs which are treated as Virtual Digital Assets and included in the definition of Property under the provisions of the Income Tax Act are providing Services through their customers, accordingly, GST (CGST & SGST) will become payable @ 18% on the commission generated by them.

https://cbic-gst.gov.in/pdf/new-faq-on-gst-second-edition.pdf

https://www.cbic.gov.in/resources//htdocs-cbec/gst/Schedule%20of%20GST%20rates%20for%20services.pdf

https://www.cbic.gov.in/resources/htdocs-cbec/gst/GSTratescheduleforgoodsason31032021.pdf

https://www.cbic.gov.in/resources/htdocs-cbec/gst/services-booklet-03July2017.pdf

Vijay Pal Dalmia, Advocate

Partner Vaish Associates Advocates

Supreme Court of India & Delhi High Court

Email id: vpdalmia@vaishlaw.com

Mobile No.: +91 9810081079

LinkedIn: https://www.linkedin.com/in/vpdalmia/

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Twitter: @vpdalmia

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