India & Cryptocurrencies
Looking back in 2010, only a few people at that time knew what Bitcoin meant and even when some people got to know about it, they considered it as a kind of Ponzi scheme.
At present, any crypto or virtual currency is not recognized as a ‘currency’ by the Reserve Bank of India (RBI) or any other authority in India.
Looking back in 2010, only a few people at that time knew what Bitcoin meant and even when some people got to know about it, they considered it as a kind of Ponzi scheme. Also, there were some analysts who thought of it as a big bubble which is bound to burst soon.
Now, fast forwarding to 2017 with Bitcoin making headlines now and then, people are increasingly looking at it and wondering how it is going to impact their lives in one of the fastest developing countries of the world. So what are cryptocurrencies, the risks and fortunes associated with them, and the governmental regulations related to it in India?
To know the state of cryptocurrency in India, first, it is important to understand what cryptocurrency, or in particular Bitcoin is. Cryptocurrency or the virtual currency makes use of uses cryptography that makes it secure. Bitcoin was the first cryptocurrency, created in 2009. Bitcoins are neither physically printed currency nor are backed-by government or any institution. Thus, bitcoins are used as a tool for anonymous transactions. It runs on a decentralized ledger which is kept running by miners, known as the blockchain. Reportedly, there are currently more than 780 cryptocurrencies in the world.
Now coming to the status of the bitcoin in India and how the government treats it. At present, any crypto or virtual currency is not recognized as a ‘currency’ by the Reserve Bank of India (RBI) or any other authority in India. In December 2013, the RBI warned users, holders and traders of virtual currencies, including bitcoins, about the potential financial, operational, legal, customer protection and security related risks. The RBI worries about misuse of digital currency by terrorists and fraudsters for laundering money. Thus, the use of digital currencies for illegal, antisocial and illicit activities may not be controllable.
The Reserve Bank of India further in its press release dated February 1, 2017, said that it has not given any license and authorization to any entity or company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc dealing with virtual currencies will be doing at their own risk. According to some experts, bitcoins are similar to the prepaid instruments which are regulated by the RBI. However, no such recognition of digital currencies under ‘payment systems’ or ‘prepaid instruments’ has been made by the RBI.
In India, till now there is no clarity regarding the status of cryptocurrency and its tax treatment. According to the Foreign Exchange Management Act (‘FEMA’), the term currency includes, ‘all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.’ Further, the CGST Act 2017, defines the term ‘money’ in section 2(75) as ‘the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other instrument recognized 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.’
Thus, considering the above definitions, crypto or digital currencies don’t fall under the set criteria. Also, the taxation of any goods/services is governed by their classification under the taxation law.
On the subject of tax treatment, India lacks clarity. So in order to understand it better, we can look at the how other countries which have accepted virtual currency are treating this matter. In some countries, cryptocurrency is classified as ‘intangible property’ and hence is subject to GST. On the other hand, some countries consider it as ‘other negotiable instruments’ and exempt it from VAT/GST. For instance, under Singaporean tax law, the supply of the cryptocurrency is treated as a supply of services and hence GST is payable on supply, as well as on any subsequent trade of ‘virtual currency’ for other goods or services. In Canada, digital currencies are considered as intangible goods and tax is applied accordingly.
Clearly, the taxability issues have been accordingly defined by the countries which have recognized and classified the virtual currencies. India’s stand on the status and tax issue of the digital currency still remains unclear which will lead to tax and regulatory issues. Despite the fact that regulations on digital currencies will defeat their basic purpose of being free from any government interference, the issue needs to be addressed by the Indian government. Through the use of digital currencies and related technology in India, the government should look to develop the Indian economy.
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