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Cryptoasset - RBI Clarification

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Cryptoasset - RBI Clarification

Abstract

The Reserve Bank of India Monday issued a clarification around Bitcoin and cryptocurrency trading, informing banks that they cannot warn customers against trading, using an old order. The clarification comes as a relief for the crypto market which has been dealing with a lot of confusion and uncertainty in India. RBI’s statement came in response to the warnings issued by banks to their customers, asking them not to invest in cryptocurrencies, citing an old order by the central bank.

Hello !

Reserve Bank of India on Monday 31^st of May, 2021 has issued clarification on Virtual Cryptocurrency trading in India.

“The Reserve Bank of India Monday issued a clarification around Bitcoin and cryptocurrency trading, informing banks that they cannot warn customers against trading, using an old order”.

HIGHLIGHTS of the clarification:

RBI has issued a clarification on crypto trading.
RBI says banks cannot warn customers against trading.
The statement is a huge of vote of confidence for crypto.

The Reserve Bank of India issued a clarification around Bitcoin and cryptocurrency trading, informing banks that they cannot warn customers against trading, using an old order. The clarification has comes as a big relief for Indian Investor and for the crypto market which has been dealing with a lot of confusion and uncertainty in India. RBI’s statement came in response to the warnings issued by banks to their customers, asking them not to invest in cryptocurrencies, citing an old order by the central bank.

State Bank of India and HDFC Bank were the big names among the banks that had issued these warnings to their customers. The central bank (RBI) said that its order was set aside by the Supreme Court and cannot be cited by the banks. It’s a huge vote of confidence to cryptocurrencies by RBI amid reports of India planning a complete ban on crypto trading.

“It has come to our attention through media reports that certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular DBR.No.BP.BC.104/08.13.102/2017-18 dated April 06, 2018. Such references to the above circular by banks/ regulated entities are not in order as this circular was set aside by the Hon’ble Supreme Court on March 04, 2020 in the matter of Writ Petition (Civil) No.528 of 2018 (Internet and Mobile Association of India v. Reserve Bank of India),” the statement said.

HERE ARE FIVE KEY TAKEAWAYS FROM THE RBI CLARIFICATION.

A) India has softened its stance on crypto: Earlier this year, there were signs that the Indian government is planning to ban cryptocurrencies. A bill was also proposed in this regard ahead of Union Budget 2021, however, it was put on hold after requests from the crypto industry. The government had subsequently formed a committee to give recommendations. This was followed by reports that RBI may come up with its own digital rupee. There has been no progress since then. The Indian government is believed to have softened its stance on cryptocurrencies and the latest clarification from RBI confirms that. It suggests that we may not have a complete ban and instead, the government may only look to regulate cryptocurrencies.

B) Deposits and withdrawals may become easier: One of the problems for the Indian trading platforms has been the lack support from banks or banking systems. Several trading platforms have complained in the past that banks frequently end their tie-ups with them which stops these platforms from making transactions in the right way. This is also the reason why there are frequent issues with deposits and withdrawals on these platforms.

On many occasions in the past, investors have failed to make profit or execute their orders because of these issues. The RBI order sends across a strong message to banks to co-operate with these trading platforms. Whether they do or not, will be interesting to see.

C) Huge vote of confidence: Both RBI and Indian government have maintained silence on crypto trading. This resulted in a false narrative and negative sentiment around popular digital currencies like Bitcoin. This is the first time in months RBI has spoken and taken a step that actually promotes crypto trading, That’s a huge vote of confidence for the industry. It should help revive public interest and regain investor confidence which had taken a hit following last month’s crypto crash and restrictions in various countries.

D) India still needs to be careful: While the RBI has given a relief to crypto investors, it has suggested that both banks and crypto platforms need to make sure that these transactions are not used for fraudulent activities and tax evasion. It has asked the banks to carry out necessary customer due diligence process in line with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002.

“The banks have also been asked to ensure compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.”

E) This is not the end, it’s the beginning: The investors should know that this is not the last time you have heard from the RBI on cryptocurrency. Bitcoin, Dogecoin, Ethereum and other coins have become very popular in India over the last six months and millions of new investors have joined the crypto wave. The RBI and government have no other option but to come up with regulations to provide security to these investors. It is highly unlikely that the Indian government will stick to its initial plans of banning crypto. Instead, we should expect to hear more from it in the coming months. For now, the future looks bright for the Indian crypto industry, probably for the first time

CLARIFICATION ON TAXATION IN VIRTUAL CURRENCY TRADING: The following points need to be understood under the context of the Income Tax Act:

Business Income: These are the profits and gains received from any business or profession carried on by the tax payer at any time during the Financial Year. It includes “any” compensation received or other payment due to be received. Further, the compensation may be received in Cash or Kind.

Capital Gains: It means any income which has been derived from a “Capital Asset” (whether movable or immovable).
Capital Asset: It means property of any kind held by the tax payer, whether or not connected with his business or profession. However, this does not include any Stock in Trade.

Note: Since, the crypto currencies have not yet been declared as “Legal Tender” by the Reserve Bank of India, these cannot be considered as legal tender (cash) and shall be considered as an asset.

Let’s understand how crypto currencies would be taxed under different consequences:

Consequence 1: When a person receives Crypto currency as payment for rendering goods or services;

If a provider of goods or services receives any payment by crypto currency, then, the fair market value of the crypto currency received as consideration for rendering the goods or services will be considered as the consideration (that is the sale amount). Hence, the difference between the Fair Market Value of the crypto currency and the cost of provision of goods or services will be treated as Business Income in the hands of the tax payer and the resultant Business Income will be charged to tax at the applicable slab rate in India. Let us take the following example to understand the above more clearly:

Preach Law & Co. provides services for which he agrees to receive 2 Bitcoins. For simplicity purpose, assume the cost of provision of legal service as Rs.5,00,000/- and the Fair Market Value of 1 Bitcoin = Rs.5,50,000/-. Hence, by applying simple mathematics we can conclude that the total consideration for the services rendered is Rs.11,00,000/- (5,50,000*2) and therefore the Business Income is Rs.6,00,000/-

Consequence 2: The person receiving crypto currency as consideration sells the crypto currency

A person receives the crypto currency as consideration, it becomes his capital asset under the assumption that it is not Stock in Trade (which is discussed later). Therefore, as and when the person sells the crypto currency, the resultant difference between the Fair Market Value on the date of receipt of crypto currency (from provision of goods or services) and the date of sale of crypto currency will be treated as Capital Gain. Further, if the crypto currency is held for 36 months or less, it will be treated as Short Term Capital Gain. If it is held for more than 36 months it will be treated as Long Term Capital Gain.

While computing Long Term Capital Gain, the tax payer will get the benefit of indexation. The bifurcation of Short Term Capital Gain and Long Term Capital Gain is important since the Short Term Capital Gains are taxed at Slab Rates and Long Term Capital Gains are taxed @ 20%. Let us continue the example taken in:

Scenario 1: Suppose the bitcoins received by Preach Law & Co. is sold by him @ Rs.5,75,000/- per Bitcoin then the value of consideration that will be received by Preach Law & Co. is Rs.11,50,000/-. Hence, the Capital Gains would be Rs.50,000/- (11,50,000 – 11,00,000) and depending on the period of holding of the crypto currency, it will be taxed as Short Term Capital Gain or Long Term Capital Gain

Scenario 2: A person paying consideration by crypto currency for receiving any goods or services. If a person availing any goods or currency pays consideration in the form of crypto currency, then in such a case there will be aspects which will need to be considered:-

A) Capital Gains: The Capital Gains will be determined in the same manner as discussed in “continuation of scenario 1” and will be taxed accordingly. However, in this case the relevant dates for determination of period of holding shall be the date of acquisition of the currency and the date of payment.

B) Amount (Quantification) of the expense: The amount of expense shall be the Fair Market Value of the crypto currency on the date of payment. Let us take the following example to understand the above clearly:-

Preach Law & Co. avails goods worth Rs.11,50,000/- the payment for which is discharged by paying 2 Bitcoins (5,75,000 x 2). Assuming the cost of acquisition of 2 Bitcoins to be Rs.10,00,000/- (5,00,000 * 2), the resultant Capital Gain will be Rs.1,50,000/- and will be taxed as Short Term Capital Gain for Long Term Capital Gain depending on the period of holding. The amount of expenditure will be the Fair Market Value of the Bitcoins that is Rs.11,50,000/-

Scenario 3: A person Investing / Trading in crypto currency

This is the simplest to understand. However, the important aspect to be to be considered is whether the activity is to be considered as Investment or Trading. If the activity is considered as Investment the difference between the sale price and purchase price will be treated as Capital Gains (the treatment will be as discussed earlier) and on the contrary if the activity is considered as Trading, the difference will be treated as Business Income irrespective of the period of holding. Determining whether the difference will be considered as Capital Gains or Business Income will depend solely upon the intention of the person at the time of acquisition of the crypto currency.

Conclusion: The Indian Tax laws does not have a specific mention on how crypto currencies are to be taxed in India and remains a grey area, particularly as the exposure of people increases until a specific mention in the law is made. The crypto currency are not declared as legal tender by the RBI and hence shall be treated as asset. Further, it shall be kept in mind that the crypto currency market is an unregulated market however not an illegal one. Recent Update from Govt of India on clarification on position cryptocurrency in India. Mr. Anurag Singh Thakur, Minister of State for Finance, stated that in response to a question in the Rajya Sabha- whether the government collects income tax on cryptocurrency earing and also whether GST is collected from crypto exchanges. The gain from crypto trade and services by cryptocurrency exchanges are liable to be taxable, According to the government, because revenue from whatever source is obtained is included in the Income Tax Act, 1961, and supply of any service, if not expressly exempted, is taxable under the Goods and Services Tax (GST).

Regardless of the nature of the business, total earnings for taxes shall include all income from whatever source derived…the gains resulting from the sale of cryptocurrencies/assets are liable to tax under ahead of income,” Mr. Thakur further explained. Similarly, “supply of any service is taxable under GST if not expressly exempted, and no service related to cryptocurrency exchange has been exempted.”

Recently, the RBI announced that it is investigating the feasibility of establishing a central digital currency (CBDC) to regulate the market, which could be a major development for the crypto market. The Government of India is considering implementing an 18 % GST (Goods & Service Tax) levy on Virtual Currencies transactions.

TAXABILITY OF BITCOINS UNDER THE INCOME TAX ACT OF INDIA

Income Tax on Capital Gains from sale of Bitcoin has to be paid as below:-

Period of Holding BITCOIN	Considered as	Rate of Income Tax
Upto 36 Months	Short Term Capital Asset	Same as applicable on other Incomes of the Assessee
More than 36 Months	Long Term Capital Asset	20% of Sale Value

NOTE : Few consultants considers Sale of Bitcoins generated by Mining as Exempt, since their cost cannot be identified, referring the decision of H’ble Supreme Court in the case of CIT v B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). We do not agree with this view, since BITCOIN are covered within the definition of Capital Asset as per Sec 2(14) of the I. T. Act and this view may be a matter of debate & Litigation.

GST LIABILITY ON SALE OF VIRTUAL CURRENCIES

Query No.		QUERY & REPLY
FAQ 1	:	Are BITCOINS covered within the meaning of Supply under the GST Act?
Our View	:	Yes – In our view, they are treated as Supply within the meaning of Section 7 of the CGST Act, 2017 since VC/BITCOINS are not covered under any of the below exclusions: a) Money [as per Section 2 (75) of CGST Act, 2017]; b)Securities [as per clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956]; and c) Schedule III of the CGST Act, 2017;
FAQ 2	:	Are BITCOINS Exempted, NIL Rated or Zero Rated Supply under GST?
Our View	:	No
FAQ 3	:	Who is responsible to pay GST in a Transaction of GST?
Our View	:	The liability for collection & payment of GST on BITCOINS is on the Seller of BITCOINS.
FAQ 4	:	Is there any basic exemption limit prescribed under GST that applies on Sale of BITCOINS?
FAQ 5	:	Whether BITCOINS are covered under Goods or Services?
Our View	:	In terms of Schedule II of the CGST Act 2017, development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software and temporary transfer or permitting the use or enjoyment of any intellectual property right are treated as services. But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523. In our view, in case of first sale of Bitcoin after Mining, they would be treated as Service and second sale of Bitcoin should be treated as Goods.
Our View	:	Yes – Basic exemption limit for registration u/s 22 of CGST Act, 2017 upto a limit of Rs.20 Lakhs (10 Lakhs in Special Category States) of Aggregate Turnover is also applicable of BITCOINS. But this limit covers global turnover of the assessee in a year, including exports & exempted turnover.
FAQ 6	:	What should be the Rate of GST on BITCOINS?
Our View	:	In our view, sale of Bitcoins are liable to GST @ 18%.
FAQ 7	:	In case of default of GST, who would be held responsible:-a)The Buyer; b)The Seller; Or c)The BITCOIN Exchange
Our View	:	As discussed earlier, sale of Bitcoin is not covered under RCM and hence the liability for GST on Bitcoin is on the Seller