Examining the Nature of Bitcoins and its Taxation Potential
The AAR has not decided the issue of taxability of bitcoins as of now and the above-mentioned proposal by the Central Board of Indirect Taxes and Customs has not yet been accepted by the GST Council. Therefore, there exists a void with respect to the taxation guidelines of such cryptocurrencies. This part of the article would precisely aim to target this void and attempt to provide clarity vis-à-vis the taxation implications of bitcoins. However, before making a conclusive statement regarding the taxation prospects, it is of imminent importance that the foremost inquiry is conducted on the line of finding out the category under which bitcoins would be taxed? Would they be taxed as goods or as service or a movable property or a security or a derivative or an actionable claim or money or currency or pre-paid instrument or any other category? It is this categorization that would help to decide the correct implications for tax purposes.
According to §7 of CGST Act, GST is levied on “taxable supply of goods and services” (emphasis supplied). Goods are defined in §2(52) of CGST Act as “every kind of movable property other than money and securities, but includes actionable claims, 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” (emphasis supplied). Services have been defined in §2(102) of the act to mean “anything other than goods, money and 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.” (emphasis supplied). Therefore, it should be inquired as to whether bitcoins fall in any of these categories to come under the tax ambit of the CGST Act.
Category 1: Securities or Derivatives?
The CGST Act defines securities as a cross reference to the Securities Contracts (Regulation) Act, 1956. It is evident that bitcoins do not find mention in the definitional clause of securities. So, strictly as per definition, bitcoins cannot be characterized as a security. However, the scrutiny does not end here as the Supreme Court in Sudhir Shantilala Mehta vs Central Bureau of Investigation highlighted that the definition given in the section is an inclusive one and should be given an “expansive meaning” and if something is commonly understood as security, it can still be included despite not being mentioned in the section explicitly. Therefore, the next level of inquiry is whether or not bitcoins can be conceptually understood to be a security? Conceptually, securities do not have any intrinsic value and whatever value is possessed, it is derived from the “right that it represents” over the issuer of the security. Two parties are required for it to function (the subscriber and the issuer) and an essential feature of it being an “issuer” of the security. However, bitcoins are decentralized and are not issued by anyone and there is no contract to repay the value which the bitcoins represent. Similar contractual requirement of a derivative (the term ‘derivative’ is defined to mean an instrument settled at a future date whose value is derived from the change in one or a combination of variables prescribed under the section, namely interest rate, price of securities (CG or SG or foreign securities), foreign exchange rates, index of rates, credit ratings, prices of gold or silver or bullion, or any other similar variable. However, since the value of cryptocurrencies is independent of these factors, it cannot be called as ‘derivative’ under the RBI Act) to hedge risk is also absent from bitcoins and therefore it is not possible to conceptually categorize bitcoins as a security or a derivative.
Category 2: Pre-Paid Instrument?
Pre-paid instruments (PPI) are either issued by the bank (allowed to issue Open, Semi-closed & Closed system payment instrument) or by any person or a Non-Banking Finance Institution (‘NBFC’) (allowed to issue only Semi-closed system payment instrument). Again, one encounters the same problem of the bitcoins not being issued by a “person” (an algorithm cannot be regarded as a person) or by a bank or NBFC. Secondly, PPIs have an absolute and pre-defined value whereas the value of bitcoins constantly fluctuate and is far from pre-defined or absolute. Therefore, it is not possible to conceptually categorize bitcoins as a PPI.
Category 3: Actionable Claims?
The CGST Act defines actionable claims as a cross reference to the Transfer of Property Act, 1882. Evidently the definition does not explicitly include bitcoins in it. The Supreme Court, while discussing the definition given in the act, has recorded that it comprises two claims. Firstly, a claim to an “unsecured debt” and secondly, a claim to “beneficial interest in a movable property which is not in possession of a claimant”. These claims must also be capable of being enforced by the courts.
Bitcoins evidently do not fall within the category of unsecured debts because of the absence of any person guaranteeing the repayment of a pre-defined value that was attributable to the bitcoin. As far as the second claim is concerned, there must be two prerequisites for bitcoins to be classified as actionable claims: a) beneficial interest in movable property and b) the property not being in the possession of the claimant. Even if one assumes for a moment that bitcoins can be termed as “movable property”, they can never fulfil the requirement of being in the possession of someone else as they are directly credited into the e-wallets of the owner/buyer/miner. Therefore, it can be safely concluded that bitcoins cannot be successfully categorized as actionable claims.
Category 4: Movable Property?
The above analysis proceeded on the assumption that bitcoins can be said to be a movable property. This part would test this assumption. §2(52) of CGST Act includes movable properties (apart from money and securities) to be a part of “goods” that could be taxed. It has already been established above that bitcoins do not fall under the category of securities. For this part, it shall be assumed (but not admitted), that bitcoins cannot be categorized as money. Consequently, the need arises to evaluate if they can be termed as a “movable property”.
The Supreme Court has held that the term “movable property” jurisprudentially includes both corporeal and incorporeal property. Therefore, rights in intangible properties like patents, debt contracts and other rights in rem are now included in the category of “movable property”. A right in rem is created when one can enforce some right arising out of a thing against anyone: for instance, a right over one’s house. Similarly, a right in personam is created when you can enforce your right against a person: for instance, your debtor. Now because the bitcoins are not issued by a central authority or other issuer, it is not possible to enforce this right in rem and argue that the owner of ‘X’ number of bitcoins has a right against a person/authority to receive an amount equivalent to the value of ‘X’ number of bitcoins. Had it been a legal currency issued by the government or the central bank, the owner would have had the right to receive an equivalent valuation from them. It is because of this reason only that the currencies issued by the bank and government appear as “liabilities” in their records and as an “asset” in the record of the person who holds the currency. Transposing this discussion in the context of bitcoins, it is seen that bitcoins create no such corresponding liability for anyone (neither a person, nor an authority) which the owner can encash. Therefore, it is difficult to establish bitcoins as a property. This claim has also been fortified by rulings of Tokyo District Court which has held that such VCs are not property and ipso facto, any claim for its theft cannot be entertained.
(This post has been authored by Ayush Mishra. He is an alumnus of the NALSAR University of Law, Hyderabad and is currently working as an Advocate at the Hon’ble High Court of Allahabad)
Cite as: Ayush Mishra, ‘Taxation of Cryptocurrency under the GST Regime (Part I)’ (The Contemporary Law Forum, 11 October 2020) <https://tclf.in/2020/10/11/taxation-of-cryptocurrency-under-the-gst-regime-part-ii> date of access.