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Budget Highlights
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FM declares use of crypto-currencies illegitimate

February 1, 2018 9545 Views
Saloni Roy
Partner, Deloitte Haskins & Sells LLP
Abhirup Ghosh
Senior Manager, Vinod Kothari Consultants Private Limited

The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system - Finance Minister in Budget Speech, 2018

Abhirup Ghosh

Saloni Mathur

In the words of Mr. Richard Brown, executive architect, IBM "So my view is quite clear, I believe Bitcoins, Cryptocurrency, is the first example, I believe they are going to change the world." However, it does not seem that the Indian Government is very fond of this.

In spite of all the hype and the enthusiasm being witnessed in this mystified currency, it is indeed hard to accept the fact that cryptocurrency market still, has no supportive legal and the regulatory backing behind it and the expectations of many must have been shattered when the FM was reading out the Budget Speech this year.

There were strong expectations of the market that the Government would give crypto-currencies some sort of a legal colour, however, on the contrary the FM declared the usage of crypto-currencies completely illegitimate.

This move from the Government is however not something unexpected, let us have a quick recap on how the Government reached to this stance:

This will move itself is sufficient to drag down the prices of the VCs in India. The table below would show us the state of the market immediately before the budget:

Sl. No. Name Market cap Price(in US dollar) Circulating supply 1. Bitcoin $197,352,996,930 $11725.20 16,831,525 2. Ethereum $119,102,757,386 $1224.50 97,266,441 3. Ripple $51,179, 443,742 $1.32 387,391,42,811 4. Bitcoin cash $29,030,543,466 $1714.05 1,69,36,813

Source: coinmarketcap.com1

Probable impact on the market post budget

Undoubtedly, the market for crypto-currencies will shrink after the budget but how fast the market will shrink, one has to wait and watch. But the most apparent question that arises that what will happen the currencies that investors are holding as on date or what will happen to the gains from dealing in crypt-currencies till date. While it is difficult to state what measures the Government will adopt to crack down on the currencies, but it looks likely that if a person has gained anything from the dealing in crypto-currencies, the same shall be subject to tax under the Income Tax Act. However, under what head will the same be charged to tax, it is yet to be determined.

If the investment is these currencies were made in the form of investments, then, ideally the gain should be charged to tax as capital gains. However, if the buying and selling happened frequently, then there is a likelihood that income shall be treated as business income. Nothing has been clarified in this regard in the Union Budget.

From indirect taxes point of view, the bitcoin exchanges in India, applied for an advance authority ruling under the Goods and Services Tax, however, the outcome of the same is yet to be received. In the said application, the exchanges had sought for a clarification on whether the dealing in bitcoins must be treated as supply of goods or supply of services.

After this move from the FM, it will be interesting to see if the AAR comes out with a clear answer or not. The reason is very simple, till date, estimates show2 that if these are made taxable, the exchanges could end up coughing up to INR 7000 crores worth of taxes, as only top 7 exchanges alone report an overall revenue of the INR 40,000 crores.

However, there is very less doubt that the services provided by the exchanges to the investors shall be subject to GST at the rate of 18%, as the services which are not specifically covered under the law, are charged to GST as per the mentioned rate.

Therefore, the picture of the VC industry after the budget can be summarized as follows:

  a. It is now clear that dealing in crypto-currencies are illegal in India;

  b. There is a strong likelihood that the gains from dealing in VCs will be brought to tax under Income Tax Act, this is evident from the number of notices that are being served by the income tax department to the persons dealing in VCs;

  c. While it is still not clear whether dealing in VCs can be taxed under GST as supply of goods or supply of services, however, it is very clear that the for the services provided by exchanges in facilitating the trades, GST will have to be charged at the rate of 18%.







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