GST on Cryptocurrency – An Overview

To understand cryptocurrency in simple terms, you can say that it is a digital/virtual asset acting like a currency. To make it clearer, let us say Physical Currency, the Indian Rupee is being issued by Central Agency named Reserve Bank of India; you would find that every note contains a unique Serial Number. The same is being certified by the Governor of RBI. An essential feature of any currency is that it cannot be double used. For example, a rupee two thousand note bearing serial number “15462” cannot be used twice, and RBI Confirms the authenticity of the same whether the note is original or counterfeit.

Cryptocurrency has a slightly different version; unlike physical form, it has a digital form. But as we have a central agency such as RBI to regulate the physical INR, this digital currency is managed over decentralized networks based on block chain technology. Records of ownership and transfers are being stored over various digital blocks called distributed ledgers on decentralized servers which are connected to each other like a chain. Hence, there is no possibility of the double use of any currency as all of them are being backed by Distrubuted ledgers provided by a network of different computers. As the transaction is encrypted and have hash codes, if any manipulation is done with this ledgers, the blocks would not tally with each other; as a result, the whole block would fall out from the chain. Transfers made of these cryptocurrencies are being confirmed by the miners who have the records, i.e. the address from cryto currency originated.

People have a lot of questions about whether cryptocurrency is legal in India. Now the answer to this question is, as of now, cryptocurrency is not illegal in India. But we also need to acknowledge that there is no legislation over it yet as of the date. We can expect that some or the other legislation will come down soon. The second part of the question is whether crypto currency is a substitute for physical currency, i.e. whether it is a legal tender as of the date. The answer is no cryptocurrency is not a legal tender to accept payments. Currency notes have a fundamental element of a promissory note, which is missing in the case of cryptocurrency as they are not promissory notes. Further, the basis of printing currency notes is based on something such as the nation’s wealth, which is not the case in the case of cryptocurrency. That means you cannot go and buy a refrigerator and tell him to accept payments in the form of bitcoins. Yes, it is also true in India that Cryptocurrency is not a legal tender for making payments, and this is true for almost all the countries in the world.

There are various types of cryptocurrencies in the market. It is estimated that more than 2000 types of cypto currencies are trading in the market. Few of the currencies values are being linked to a particular kind of asset. For example, the value of the USD Tether (Poplularly known as USDT) is linked to the value of USD. There are few other tokens whose value is linked with the GOLD prices. Hence, these kinds of currencies are called fiat currencies.

You would see currently that numerous technological projects are going on in the market, and many start-ups have used this route to raise funds under the name of crowd funding. The question would remain in the mind that when you acquire this crypocurrency do you acquire any rights over the asset of the project or something. Sadly the answer is negative. You do not hold any rights over the company or project when you buy this kind of token in the primary or secondary markets.

In the previous questions, we have answered that cryptocurrency is not legal tender of money. Further, you cannot equate this cryptocurrency with any kind of shares or securities as underlying assets are absent. You can equate any cryptocurrency token with a sort of digital asset and nothing more than that.

The market’s volatility depends on the demand and supply completely driven by the market’s craze. It can be said people are following the trend on the subject.

Let us examine how are securities being defined in the act.
As per section 2(101) of the Central goods and services tax act, 2017, securities are “securities” shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). It is a well-known fact that cryptocurrencies are not covered under any act, so the question of getting covered under the securities contracts (Regulation) Act, 1956 is out of context. Hence, cryptocurrency cannot be classified as securities.

As per section 2(52) of the Central Goods and Service Tax Act, Goods are being defined as follows:-

“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;