#TaxmannPPT | Cryptocurrency - The GST Enigma | TMSL

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GST on Cryptocurrency & Crypto Exchanges Jigar Doshi Founding Partner, TMSL www.tmslglobal.com

INDEX OVERVIEW GST IMPLICATIONS GLOBAL TRENDS

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OVERVIEW

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OVERVIEW – WHAT’S HAPPENING

CRYPTOCURRENCY – INDIA FACTSHEET 10k bitcoins

8th $1.77 Tn

Largest Economy globally

2 Secs $20 mn

Global Cryptocurrency market

1st bitcoin purchase ever made- 2 Pizzas

India- has highest number of crypto owners in the world!

More than 10 crores!!!

India crypto tech industry to touch $241 mn by 2030

Global mining income

72% 14k

A post on social media appears on cryptocurrency

Bitcoin ATMs

309

Bitcoin mining is done in China

Cryptocurrency spot exchanges

“ Bitcoin is neither fish nor fowl… But both pricing it as a commodity when no commodity exists and trying to make it behave as a currency, seem problematic. The problem is not that it is not issued by the Government nor that it is unregulated. The problem is that it is hard to see what it is.”

-George Friedman, Founder and Chairman of Geopolitical Futures LLC.

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BITCOINS AND CRYPTOCURRENCY CRYPTOCURRENCIES

BITCOINS • 1ST Crypto currency

• Decentralized authority

• Very secured- uses SHA 256 algorithm which has 2256 private key combinations

• Free from control by one person

• There are high profile hacks, but these are hacks on computer which stored Bitcoins and not the Bitcoin network

• Cannot be forged • Lower transaction fee

• Introduced by way of a whitepaper Bitcoin: Peer to Peer Electronic cash system

• Uses block chain as base

• Author’s pseudo name: Satoshi Nakamoto

• Issues:

• Approx. 4,000 cryptocurrencies around the world

• No asset backing and no physical form

 Transaction verification is time consuming

• Miner's reward (Halved after every 210,000 blocks)

 Flood of cryptocurrencies

 2009 – 50 Bitcoins

 If Miners protest, then entire system can be exploited

 2020 – 6.25 Bitcoins

 No grievance mechanism in case of incorrect transaction

• 21 mn Bitcoins in total will be mined  2 mn Bitcoins already mined

 Last Bitcoin will be mined in year 2140

HOW CRYPTOCURRENCY COMES INTO EXISTENCE?

Mar Jan Feb

Listing

Transaction

Whitepaper

Oct Apr May Jun

Aug Sep

Oct Nov Dec Jan

Jul

ICO

Mar

Feb

Mining

Apr May Jun Jul

Aug Sep

Nov Dec

HOW CRYPTOCURRENCY WORKS? Nodes Sender

1

2

Requested transaction is broadcasted to the P2P network consisting of Pcs known as Nodes

Transaction is initiated and represented as a Block

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3

Blockchain

Nodes are validated by the Miners after solving difficult algorithms

Block is added to the existing Blockchain

Distribution Update is distributed across the network

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Miners

6

Cyrptocurrency Transaction is complete

COMMON TERMINOLOGY Cryptocurrency Digital currency designed to work as a medium of exchange in which transactions are verified and recorded by a decentralized system using cryptography

Mining Crypto mining is the process of validating crypto currency transaction through linking to previous & subsequent transactions creating a chain of time-stamped records called a blockchain. The entities or people conducting mining are termed as miners. Miners derive either mining fees or are rewarded with cryptocurrencies themselves

Crypto-exchange Platforms that allow holders to exchange their cryptocurrency holdings for major fiat currencies like the U.S. dollar and euro, and for other cryptocurrencies, including less-popular currencies.

NFTs Non-Fungible Token (NFTs) is a blockchain digital file that can comprise of rare paintings, letters, videos or sound clips.

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INDIAN HISTORY OF CRYPTO CURRENCY 2013

14-15

2017

2018

• No regulations in India;

Bitcoin Begins to trade on multiple exchanges.

RBI cautioned citizens on bitcoins

• RBI stated that virtual currency is driven by speculation;

Cryptoexchanges formed in India; awareness increased

• Circular issued by RBI to banks to stop providing any services to any individual or business dealing with or settling digital currency • Crypto token and crypto asset (Banning, control and regulation) Bill, 2018 tabled for discussion • Petition filed by Internet and Mobile Association of India before SC • In his 2018 Budget speech the FM mentioned that “the Govt. does not consider crypto currencies as legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of payment systems”.

INDIAN HISTORY OF CRYPTO CURRENCY 2019

2021

2020

Banning of Cryptocurrency and regulation of Official Digital Currency Bill, 2019 bill tabled

2022

The Cryptocurrency Regulation of Official Digital Currency Bill, 2021 tabled for discussion

• SC set aside RBI circular and held the same as “manifestly arbitrary, based on non-reasonable classification and it imposes disproportionate restrictions”

Announcements in Budget 2022 (approved in Lok Sabha):

• Allows crypto currency trade to be supported by the financial system.

• Set-off of losses (same source/other source) – Not allowed

• SC stated that Cryptocurrency are unregulated but not illegal

• Income tax on transfer of Virtual Digital Asset (VDA) @ 30%

• 1% TDS on all crypto transactions • Only cost of acquisition will be allowed as deduction; Expenditure on mining infrastructure not to be treated as cost

RECENT UPDATES

GST ANGLE Government working on classifying crypto as goods or services.

Officers opine that Crypto is akin to lottery, casino, gambling, horse race.

GST should be applicable @ 28%

DIRECT TAX

ICAI

CRYPTO FRAUDS

Norms prescribed in Budget 2022; covered in previous slide

The ICAI is working on research paper for guiding its members on accounting and auditing standards for crypto assets

Wide array of crypto frauds are being noticed including money laundering, fake mobile apps, stolen funds etc.

RECENT UPDATES

GST IMPLICATIONS

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CRYPTOCURRENCY FROM GST ANGLE: THE MOOT QUESTION!

Money

What is Cryptocurrency

Goods

Per S. 2(75) of CGST Act ‘money’ means • Indian legal tender • 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.

S. 2(52) of CGST Act - ‘goods’ means: • 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.

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CRYPTOCURRENCY FROM GST ANGLE: THE MOOT QUESTION!

S. 2(102) of CGST Act - services means anything other than goods, money and securities

Services

What is Cryptocurrency

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;

2(h) of Securities Contracts (Regulation) Act, 1956 “securities” include (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]; [(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]; [(id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities.

Securities are based on underlying asset. SEBI in 2018, responded to the draft bill with the comment that it is not best suited to regulate cryptocurrencies.

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CRYPTOCURRENCY FROM GST ANGLE: THE MOOT QUESTION!

Actionable claims

Section 2(1) of the CGST Act read with section 3 of the Transfer of Property Act define ‘actionable claim’ to include two situations: (i) an enforceable claim to an unsecured debt, and (b) an enforceable claim to a beneficial interest in a movable property which is not in possession of the claimant.

Movable properties under General Clause Act, 1847 and Transfer of Property Act 1882, has been defined to say that movable property is anything except for immovable property.

What is Cryptocurrency Intangible asset has not been defined under the GST law. A reference to the Apex Court’s ruling in the case of TCS vs. State of Andhra Pradesh [(2005) 1 SCC 308] where the question before the SC was whether software goods?

Intangible Asset

The SC held that software was undoubtedly goods, as it was an article of value having regard to its utility, capability of being bought and sold, and capability of transmission, delivery, storage and possession. Since software satisfied these conditions, it would indeed be goods, whether customized or non customized & whether tangible or intangible.

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CRYPTOCURRENCY FROM GST ANGLE: THE MOOT QUESTION!

Global Inspiration

Treat Cryptocurrency as ASSET/ PROPERTY

RBI’s inclination

Introduce centralized virtual currency of its own!

CBDT will now tax Cryptocurrency and NFT as an asset i.e., Virtual Digital Asset. The FM in her Budget speech also used the term asset. This indicates that the Government is inclined to classify Cryptocurrency as an asset.

In 2021, a question was posed before the finance ministry in the parliament – ‘whether the earnings from cryptocurrencies is being subject to tax’?

To which the ministry replied that any income irrespective of where it is derived from should be offered to income tax; hence, any profits or gains from dealing in cryptocurrencies should be subject to income tax.

The ministry added, that any supply of goods or service which has not been exempted would be liable to GST; no supply in relation to crypto currency has been exempted from GST specifically.

The Central Economic Intelligence Bureau (CEIB) in year 2020 had proposed to the CBIC that the cryptocurrency market in the country would reach at about Rs 40,000 crore and suggests to classify bitcoins as ‘intangible asset’ and levy GST @18% on margins made while trading in such currency. However, there are no concrete steps taken by the CBIC in this regard.

POSSIBLE TRANSACTIONS IN CRYPTOCURRENCIES Typically, there are two types of transactions which can be envisaged by use of cryptocurrencies, viz.: 1. Trading in Cryptocurrency; 2. Using cryptocurrency as a consideration medium to pay for any supply of goods or services or both; 3. Trading in goods/ services through NFT Let us try to understand each transaction and its GST implications  Parties involved: i. Buyer TRADING IN CRYPTOCURRENCY ii. Seller iii. Cryptocurrency exchange  There could be following possible scenarios: Crypto exchange i. All parties could be situated outside India – In which case the transaction Sell Buy will not be taxable in India cryptocurrency cryptocurrency ii. Few parties could be situated in India and others outside India – Import/ export transaction; accordingly, taxability can be determined. Conditions to Person A Person B Commission be called as an export to be satisfied. income iii. All parties situated in India – Taxable in India.

Open Questions: 1. Commission income or traded value – Which shall be the taxable value?

2. Place of supply in case transaction are taxable in India. Which type of tax is applicable – CGST/ SGTS/ IGST? 3. Treatment of time of supply – Voucher or goods?

4. Eligibility to avail credit – In the course or furtherance of business?

5. In case of export, can crypto currency be termed as convertible foreign currency?

POSSIBLE TRANSACTIONS IN CRYPTOCURRENCIES TRANSACTING IN CRYPTOCURRENCY Miner/ Pooling of Miner

For liquidity and valuation Cryptocurrency

exchange Mining fees

Payment for supply made

Buying goods against cryptocurrency Supply of good and/or services;

Person A

 Parties involved: i. Buyer ii. Seller iii. Cryptocurrency exchange iv. Miner  Similar to the previous slide, there could be various possible scenarios and taxability would be determined accordingly.  Miner may receive fees in either fiat currency or cryptocurrency.

Person B

Open Questions: 1. Ambiguity prevails as regards to barter transactions i.e., which transaction should be considered as supply and which as consideration; valuation of such transactions and other such aspects.

2. Taxability of listing fees and transaction fee charged by exchanges 3. Whether crypto exchange would be an intermediary in terms of GST law?

4. Whether services rendered by crypto exchange situated outside India would be classified as OIDAR services?

5. Place of supply to be determined? Which type of tax to be levied – CGST/SGST/ IGST 6. Time of supply – Voucher or goods?

CAN MEDIATING CRYPTOCURRENCY BE CALLED OIDAR SERVICES? As per the S 2(17) of IGST Act, 2017, “Online Information and Database Access Retrieval (OIDAR) Services mean services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as, –– 1. advertising on the internet; 2. providing cloud services; 3. provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet; 4. providing data or information, retrievable or otherwise, to any person in electronic form through a computer network; 5. online supplies of digital content (movies, television shows, music and the like); 6. digital data storage; and 7. online gaming;” Place of supply in case of OIDAR services In case, both the supplier of OIDAR Service and the recipient of such service is in India, the place of supply would be the location of the recipient of service i.e., it would be governed by the default place of supply rules.

In cases where the supplier of such service is located outside India and the recipient is a business entity (registered person) located in India, the reverse charge mechanism would get triggered and the recipient in India who is a registered entity under GST will be liable to pay GST under reverse charge and undertake necessary compliances.

In cases where the supplier of such services is located outside India and the recipient is a non-taxable person in India then supplier of services located in a non-taxable territory shall be the person liable for paying integrated tax on such supply of services.

CASE STUDY: DGGI INVESTIGATION

Leading cryptocurrency exchanges are not charging GST till date

•Recently, DGGI demanded GST to be paid on various fees and margins earned by such exchanges.

•GST @ 18 % has been demanded on such revenue.

•In the past ED had also issued notice to exchanges over possible FEMA violations*

Regulatory ambiguity has led to hefty penalties and interest.

Budget 2022 did not throw any light in GST implications on cryptocurrency

Progressive and unambiguous scheme is required Even if any player in the industry is willing to comply, there is absolutely no one holding the torch.

*Source: https://www.business-standard.com/article/markets/ed-slaps-fema-contravention-notice-against-india-s-largest-crypto-exchange-121061100812_1.html

CASE STUDY: HOW NUMBERS LOOK LIKE SN 1 2.

3.

4.

5.

Particulars GST amount recovered on commission income from crypto exchanges GST rate applied Commission income (1/2) Rate of commission Traded value of crypto exchange (3/4)

Amount (in crores) 40.5 18% 225 0.2% 1,12,500

As per media reports, one of the India’s leading cryptocurrency exchange recorded a trading volume of over $38 billion in 2021*!

In case the Govt. of India hold cryptocurrency to be an intangible asset, the entire traded value would be subject to GST in addition to the commission amount being subject to GST as service.

In March 2022, a CBIC official said that if GST is levied on the entire transaction of cryptocurrencies, then the rate could be in the range of 0.1 to 1 per cent. *Source: https://www.livemint.com/companies/news/wazirx-trading-volume-rises-by-average-44-mom-in-2021-to-38-billion-11636704729123.htmlhtml

Sample Commission Invoice from Cryptocurrency exchange

What is NFT?

Non-Fungible asset i.e., something that cannot be interchanged

Represent ownership of unique items

Fiat currency required to obtain NFT

Can represent a wide variety of thinks like art, music, fashion etc.

Digital blockchain tokens

NFT transactions happen through smart contracts

What can NFT be created for?

Literature

Art

Real Estate

Iconic Tweet

NFT Music

Fashion and Lifestyle

GIFs

Poetry

NFT – Recent Updates

NFT - Some Interesting Facts

In 2021, auction house – Christie’s sold its most expensive digital art in history (Beeple’s Everydays: The first 5000 days) for $69.3 mn

The National Basketball Association converted the video highlights of games and sold them to fans as NFTs. This generated $600 mn

Merely after one year of this sale, Christie has now crossed $100 mn in NFT sales

In the third quarter of 2021, NFT sales were recorded at $10.7 bn; more than 8 times higher than the previous quarter

GLOBAL TRENDS

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GLOBAL TAXATION OF CRYPTO CURRENCY • OECD has recently issued Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standards.

• The OECD is now seeking public comments on the proposals by April 29, 2022.

• This framework shall be of use when tax authorities exchange data with respect to crypto transactions. Thus, the same shall increase global tax transparency in the domain.

GLOBAL TAXATION OF CRYPTO CURRENCY EL SALVADOR

CUBA

Resolution to recognize and regulated Cryptocurrencies such as Bitcoin in August 2021 El Salvador became first country to accept Bitcoin as Legal Tender in June 2021

CHINA

USA

UK

Cryptocurrency is a capital asset  taxable between 0% to 37%

The government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal in September 2021

SA

OTHERS

Many scams related to cryptocurrency have taken place Putting a regulatory timeline in place, that will produce a regulatory framework

All cryptocurrency firms, that have direct / indirect services within the UK market must register with the Financial Conduct authority.

Complete Ban – Nepal, Pakistan, Egypt etc.

Implicit Ban – China, Bahrain, KSA, Qatar etc.

GLOBAL TAXATION OF CRYPTO CURRENCY CANADA

AUSTRALIA

NETHERLANDS

Cryptocurrency is treated as an asset and attracts capital gains tax/ income tax

Cryptocurrency treated as commodity; Income tax or capital gains tax applicable

GERMANY

SWITZERLAND

Treats cryptocurrency as private asset. Tax is only levied if it is sold within the same year as it was bought

Wealth tax levied

Cryptocurrency is treated as an asset

BRING ABOUT A TAX REVOLUTION AT YOUR ORGANIZATION

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