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Cracking the ‘Bitcoin’ nut this Budget Session

January 24, 2018 26215 Views
Vallari Dubey
Executive, Vinod Kothari & Company
Saloni Mathur
Executive, Vinod Kothari & Company

Introduction

1. In the words of Nassim Nicolas Talib, "Bitcoin is the beginning of something great, a currency without a government, something necessary and imperative."

If there is one term we can call 'fascinating', yet 'bewildering', it's cryptocurrency. This 'virtual currency having its roots from this untraceable group called Satoshi Nakamoto has come a long way, leaving great industry experts intrigued. While the complexity of a cryptocurrency system is difficult to decipher, people have shown mixed responses to what some call as 'the revolution of the payment system'.

There can be no denying of the fact that the demonetisation by the Indian Government on 8th November, 2016 had triggered the reincarnation of the Bitcoin revolution in India. The Government's efforts to curb trading in cash, reincarnated the Bitcoin platform of exchanging goods and services which led to a sudden hike in the trading volumes and prices of the bitcoins.

Current status

2. Despite the high trading volume of cryptocurrencies like bitcoin, comprehending their validity in terms of law is a tough Job because of the fact that it may neither be interpreted as 'currency' as defined under 2(h) of the Foreign Exchange Management Act, 1999 nor as a 'coin' as defined under the Coinage Act, 2011. In fact, post clarification of the Ministry of Finance, holding that such currencies have not been recognised as legal tenders, it is yet clear that one cannot use these for making payments as real currency. Bitcoin might fall under the term 'goods' as per Sale of Goods Act, 1930 but it does not seem to have any value in itself. In other words it does not have such a value which could be the reason why people would buy it, if they do. People would also not buy bitcoin to store value but to trade and earn profits. It is not bitcoin that has fundamental value, but the transactions in it, which help earn something. Therefore, to categorise bitcoin as 'goods' will be incorrect.

Any cryptocurremcy in India is neither banned nor regulated, but being traded under observation. So far it could be termed as grey currency of India.

A public interest litigation has been filed in the Supreme Court of India to ensure the regulatory mechanism for the working of the Bitcoins and the cryptocurrencies. However, the SEBI, and the RBI are yet to take any progressive step to regulate such currencies. Though several warnings have been issued by the RBI, things on the public front has remained unclear for quite some time now. On February 1, 20171 in a report published by the RBI, it had cautioned the users on the threats that may arise with the dependence on bitcoins as a medium to transact, rather than the transaction in the real currency. A similar caution any notice was also issued on December 5, 20172 as well.

Expectations from the Budget 2018

3. Given the fact that no material steps have been taken by the Government or any regulatory authority so far, and silence on their part sustaining for numerous days, it is highly expected that some key issues will be placed before the Parliament in the Budget session.

4. Idealistic situation

The UNION

4.1 If the Government is considering to curb or limit the trading in cash, it can do so by promoting the virtual currency and expressly declare 'bitcoin' or the 'cryptocurrency' as the legal tender. In lieu of this, the government should aim to make amendments and reforms to the existing law. Major Definitions like 'goods', 'currency', 'current account transactions', 'capital account transactions', 'service', 'coins' under various laws governing the bitcoins may be suitably amended.3

RBI

4.2 While it is clear that cryptocurrencies are far away from getting tagged as legal tenders in India, it is, however, important for RBI to clarify the same. The RBI has not expressed its views on the cryptocurrencies freely. They have only cautioned the general public about the risks associated with these currencies and have disclaimed that they have not authorised any of the exchanges to operate in India.

Moreover, foreign exchange transactions including exports and imports, investments outside India, issues pertaining to repatriation need clarity. Numerous crypto-exchanges in the country are involved in multi-national operations, however, in the absence of any explicit provisions or prohibitions, ensuring compliance with law becomes a tedious task.

Therefore, before this turns out into a bubble and it bursts, it is important that RBI comes out with a definitive stand in this regard.

SEBI

4.3 If not treated as currency, it may be a valid argument to treat a cryptocurrency as a security or a commodity. Precedent can be taken from several foreign jurisdictions such as USA, where it has been recognised as commodity derivative, pursuant to which commodity derivate exchanges would require registration with the requisite authority of USA.

A prima facie reading of the provisions of the Securities Contracts (Regulation) Act, 1956, leads us to conclude that setting-up of cryptocurrency exchanges should not require registration with the SEBI. However, if at all SEBI proposes to regulate such currencies as securities or otherwise, such requirement shall become applicable. On similar lines, several other regulations and their respective compliances would become applicable to such exchanges.

Clarifications by CBDT and CBEC

4.4 Direct and indirect tax authorities had started conducting rounds of investigations into the cryptocurrency exchanges in early December last year, trying to figure out ways and means of taxing revenue earned by such entities.

AAR

4.5 In the absence of any regulatory clarity, it is far more difficult for cryptocurrency exchanges in India to maintain records and pay taxes as may be applicable to such businesses. Therefore, these exchanges have approached the Advance Authority of Ruling (AAR) with hazy eyes, to seek clarification with respect to the applicability of the requisite taxes on transactions in cryptocurrency. However, nothing has been heard thereafter.

Direct taxes

4.6 Gains arising out of sale of bitcoins must ideally be taxed under the capital gains. If a trader is involved in the business of buying and selling of bitcoins, income from such business may be categorised as income from other sources. Any losses incurred in such business may as well be set off against income from other speculative business. This understanding is going round in the market but there is no clear communication from the government. However, looking at the way the bitcoin exchanges in India are minting money, there is a strong likelihood that the government will come out with a clear scheme for assessing these incomes.

GST

4.7 The applicability of GST on services provided by the exchanges is very clear, as any service provided by a supplier, which specifically does not attract any special rate of GST, is charged to tax at the rate of 18%. However, the crux of the problem lies in case of mining of cryptocurrencies.

One argument could be to treat mining as 'service', as mining can be treated as service provided by a person for generation of currency. However, once they are sold and bought, once the crypocurrency is introduced in the market, it may be treated as 'goods'. Therefore, it is unclear when exactly should the tax be levied.

Therefore, an explanation in this regard may be expected from the government as well.

Conclusion

5. There is much scepticism on cracking the 'bitcoin' nut during this budget session. It seems that unfolding the bitcoin complexity is only in talks. Unless the legality around it is cleared by government, there is little hope that this budget session will have anything in store for the crypto-industry.

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  1. https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=39435

  2. https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462

  3. Bitcoins India Report, 2017- By Vinod Kothari Consultants Private Limited

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