Last week Kali Digital Ecosystems lodged a petition against the RBI’s virtual ban on cryptocurrency. The apex bank of India prohibits financial institutions and banks under its authority from dealing with cryptocurrency exchanges and other related services. While there is a lack of clarity over the legality of cryptocurrency, here’s a detailed account of cryptocurrencies and GST payable.

Meaning of Cryptocurrency

A digital currency in which one uses encryption techniques to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

To break down the above-mentioned definition by Google – cryptocurrency refers to digital money. Cryptocurrency is a fairly new electronic cash system that uses a peer-to-peer network. The developers designed cryptocurrency to work as a medium of exchange. It is completely decentralized with no central authority. These currencies are a type of digital currencies, alternative currencies, and virtual currencies.

Bitcoin was the first ever decentralized cryptocurrency created accidentally in 2009. Other altcoins include Litecoin, Ehereum, Dash, etc.

How does it work?

Blockchain technology manages the peer-to-peer transactions with bitcoins. Block-chain is a record of every transaction ever made with a particular cryptocurrency. It’s essentially a public ledger that no one can alter or forge.

Cryptocurrency, Bitcoins, Cryptocurrencies, GST on Bitcoins

Is cryptocurrency legal in India?

Bitcoins have started becoming popular in India, given the government’s efforts to move towards a cashless economy. Cryptocurrencies, in general, are neither authorized nor regulated by any central authority in India. There are no set rules or regulations to deal with bitcoins. Bitcoins, as of today, are not centrally administered or regulated by any specific body like the RBI.

If the government classifies these virtual currencies as legal tender, it would mean that the government would recognize it as a currency. This means that people can freely accept it for payments and settlements. On the other hand, if it doesn’t fall under legal tender, people cannot accept it for making a financial transaction. Like gold, people may see value in it and opt to trade using them.

However, cryptocurrencies are not banned or termed as illegal in India. They fall in the grey area between legal and illegal. Last year on Nov. 30, 2017, finance minister Arun Jaitley said the country doesn’t recognize cryptocurrencies as legal tender. The government warned people against investing in them.

Whether Bitcoin is a good or service under GST?

The GST Act defines Goods and Services as follows:

Goods:

  • Every kind of movable property,
  • Including actionable claim,
  • Excluding money and securities.
  • Including growing crops, grass, and things attached to or forming part of the land which one agrees to severe before supply or under a contract of supply,

Services:

  • Everything other than goods, money, and securities,
  • Including 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 one charges a separate consideration.

It is evident from the above definitions that one cannot classify cryptocurrencies as either goods or services. If cryptocurrency gets classified as a currency, the government will consider it as ‘money’. Hence, there will be no GST on its training.

However, converting bitcoins to rupees a d vice-versa will fall under services for GST levy. It will come under the category of financial services. In such a scenario, the supplier will pay GST at the following rates:

  • Commission for providing exchange services – 18% GST on commission.
  • No commission charged – 18% GST on 1% of gross amount of money which the recipient pays.

Tax-ability of bitcoin mining under GST

In the bitcoin mining process, individuals process the transactions and secure the network by using specialized hardware. These individuals then get bitcoins as rewards. In other words, the bitcoin is a consideration given to individuals for securing the network. Therefore, bitcoin miners may have to pay GST on the fair market value of bitcoins at 18%.

Different Bitcoins exchanges in India have filed for an Advance Ruling to ascertain the applicability of GST on bitcoin.