Taxation of Cryptocurrency Under the GST Regime (Part III)



Category 5: Money?

Legal Understanding of Money

Section 2(75) of the CGST Act defines Money. It includes

  1. Indian Legal tender
  2. Foreign Currency
  3. Promissory Note, Letter of credit, Cheque, Bill of exchange, Traveller cheque, draft, money order, pay order, postal or electronic remittance
  4. Or any other instrument recognized by the RBI

This part will discuss the above 4 categories and scrutinize if bitcoins can be placed in any one of these.

Indian legal Tender

A tender which is made in legal coins or notes is known as a “legal tender”. The RBI Act,1934 in §22 lays down that it is only the RBI that has the power to issue banknotes in India. An exception has been made for One Rupee Note and coins in the Coinage Act, 2011 wherein the power to issue them has been vested in the Central Government. Moreover, the RBI act establishes that all banknotes would be considered legal tender. Certain exceptions to this have been mentioned in the Legal Tender (Inscribed Notes) Act, 1964 like a note having a message of political character would not be accorded the status of legal tender. Therefore, we see that on a bare textual perusal of the relevant acts, bitcoins cannot be granted the status of legal tender in India as they have neither been issued under the RBI act nor the Coinage Act.

Foreign Currency

From the definition of money, it can be seen that any “foreign currency” would be understood as “money” for the purposes of the CGST Act. So, the inquiry has to be whether or not bitcoins fall under this category of “foreign currency”. However, the term “foreign currency” has not been defined by the CGST Act and therefore one must borrow the definition from the Foreign Exchange Management Act. (Neither the RBI Act, 1934 nor the Banking Regulation Act, 1949 nor the Payment and Settlement Systems Act, 2007 nor the Coinage Act, 2011 define the words ‘currency’ or ‘money’. Also The Sale of Goods Act, 1930 does not define ‘money’ or ‘currency’ but excludes money from the definition of the word ‘goods’). FEMA says that any “currency” other than the Indian one would be considered foreign currency. “Currency” itself has been defined in the FEMA Act to include all “currency notes, Promissory Note, Letter of credit, Cheque, Bill of exchange, Traveller cheque, draft, money order, pay order, postal order, credit card or other similar instruments notified by the RBI.” Although this definition is an inclusive one, the exclusion of bitcoins from the ambit of RBI, FEMA, and any relevant recognition by the Central Government or Reserve Bank, makes it difficult to categorize bitcoins as a currency. Therefore, as they are not currency, they cannot be a “foreign currency” under the definition of money and consequently, they are not included in the definition of “money”.

Category (c) and (d)

As already stated, bitcoins neither find mention in the list of instruments in category (c) nor have not been recognized by the RBI specifically. Therefore, there is no possibility for textually including bitcoins in the definition of money given in the act.

Conceptual Understanding of Money

Although bitcoins do not fall under the category of money according to the strict definition mentioned in the relevant laws, it is important to note that the analysis applies archaic laws to a relatively new technological advancement. Therefore, it is pertinent to examine whether or not bitcoins can conceptually fulfil the characteristics of “money” in spite of not being formally adopted by our laws. Traditionally, money has been associated with 3 primary characteristics:

  1. Medium of Exchange: Money should be capable to be used as an intermediary for commercial activities i.e. it should be able to provide an easy medium of exchange that removes the disadvantages associated with the barter system.
  2. Unit of Account: Money should be able to provide a standard unit that is not only numerical, easily divisible, and easily convertible in nature, but is also accurate to compare the value of different goods and services available in the market. The users must accept the legitimacy of this currency and it must be understood by them at an intuitive level so that no time and energy is required to convert it into another unit to comprehend its relative worth in the market.
  3. Store of Value: Money should be able to store its value for future use and should not lose its absolute value when converted to any other currency.

If bitcoins are to be conceptually considered as money, they must be tested against these three fundamental characteristics of money. As far as being a medium of exchange is concerned, bitcoins do fulfil this criterion to some extent. However, the array of venues where bitcoins could be successfully used as a currency is very limited as of now. With regard to the second characteristic, bitcoins do not provide a standard unit of account. They are neither intrinsically or inherently valuable nor do they provide an intuitive standard to compare currencies. Even to calculate the worth of bitcoins, one has to convert the string of computer data into a readable form and then calculate it from the current exchange rate for bitcoins. Lastly, with respect to the store of value function, bitcoin fails at it massively because of its extremely volatile nature. For instance, (1) any regulator at any time can ban the use of bitcoins in their jurisdiction, (2) the entire bitcoin market may collapse at any time, (3) a new Virtual Currency (stronger than bitcoin) may appear at any time and (4) technical problems may bring down the entire server of bitcoin network at any time. Nobody would want to store his/her wealth in a system that could collapse at any time reducing their wealth to dust.

From the above analysis, it is seen that bitcoins can only partially satisfy the criteria of being “money” and even in that state, the venues at which such usage could be frequented is abysmally low. Therefore, bitcoins could not be successfully categorized as money (either textually or conceptually).

Category 6: Service?

Can Conversion into Bitcoins be Regarded as a Service?

According to the definition of service provided in the CGST Act, the conversion of money from one form to another is taxable as service. In this context, there are two possible scenarios:

  1. converting bitcoins into any other currency, or
  2. converting any currency into bitcoins.

With regards to the first scenario, it has already been shown that bitcoins do not come under the category of money or currency. So, their conversion into any other currency cannot be termed as a transaction involving the conversion of “money”. Therefore, strictly speaking, there exists no possibility of taxation in this case.

However, in the second scenario, when a legal currency is converted into bitcoins, it can be said that a currency is being converted into another form. The text does not say that a currency must always be converted into a legally recognized currency for the transaction to be considered a service. The phrase used is converted “to another form, currency or denomination” and not to any other legally recognized form, currency or denomination. Such a transaction could be understood in terms of the conversion of a legal currency into a virtual form of currency. The cost difference between the selling cost and the buying cost could be treated as consideration and accordingly subjected to GST. However, for such a transaction to be taxed, another requirement must be fulfilled. This requirement is if the transaction is done in the course or furtherance of business. Therefore, when a bitcoin exchange does this transaction of converting money into bitcoins, GST could be levied but when the same is done by an individual in his normal capacity, it would be difficult to tax it as the act does not allow for this as of now.

Can Mining of Bitcoins be Regarded as a Service?

The proposal of the Central Board of Indirect Taxes and Customs has argued for the mining of bitcoins to be considered as a service. However, meticulous analysis is required to understand that this might not be the correct course of action.

It has already been explained that the primary method of procuring bitcoins is through its mining. These miners validate the bitcoin transactions on the blockchain server through cryptographic algorithms and then record the same in the distributed ledger. If this is successfully done and further verified by other miners, the original miner receives bitcoins as his/her reward for the initial verification. However, what must be noted at this juncture is that there exists an enormous amount of competition for mining: for instance, from Chinese miners who have powerful computers to efficiently and frequently solve the algorithms. So, not all miners need to be rewarded in a transaction. In fact, there can exist a situation where miners have not even rewarded one bitcoin for very long durations of time irrespective of their constant mining efforts. For people who do eventually get this reward, there exists no certainty for the value of it as it keeps fluctuating from time to time (not just the value of reward but also the amount of reward). Though it can be said that mining may be a service that is provided by the miners, for this to be taxable under the CGST Act, it has to have some contractual link between this provision of service and the consideration (bitcoins) which it receives for this service. §7(1)(a) of the act makes it clear that for any transaction of service to be considered as “supply” under the act, it has to be made for a consideration in the course or furtherance of business. As already stated, there exists no such link between the miner and the algorithm that provides him/her with the new bitcoins. On the contrary, it has been established that many a time, the miners are not at all rewarded for their continuous mining efforts because of the fierce competition for the same bitcoins. Therefore, it can be concluded that because of the absence of any direct link between the mining service that the miners provide and the consideration that they get in the form of new bitcoins, this provision of service cannot be considered to be under the ambit of the CGST Act for the purposes of taxation of GST.

Category 7: Consideration?

An important question while discussing the character of bitcoins is whether it could be used as a consideration against the provision of service and sale of goods? §7 of the CGST Act states that supply would include a supply of service and goods as exchange or barter when decided to be made against a consideration. The definition of consideration in §2(31) mentions that payment be made in money or otherwise (emphasis supplied). Hence, one can argue that even a payment made in the form of bitcoins can suffice to be a consideration for the CGST Act. In situations when the consideration is not made wholly in terms of money, §15 of the CGST Act provides for recourse to Valuation Rules under the act. Rule 27 r/w Rules 30 and 31 provide that “in case a supply is not wholly in money terms, value of such supply shall be (i) monetary consideration plus money value of the non-monetary consideration; (ii) open market value of such supply; (iii) value of supply based on cost, i.e., cost of supply plus 10% mark-up; (iv) value of supply of like kind and quality; or the Best Judgment method.” Therefore, GST can be levied upon the taxable supply of services and goods that are provided against the consideration of bitcoins and the valuation for the same could be concluded as per the prescribed methods in the rules.


…the exact identity of virtual currencies eludes precision. Some call it an exchange of value, some call it a stock and some call it a good/commodity. There may be no difficulty in accepting the divergence of views, if those views are not driven by fear of regulation. But if someone presents it as currency to a regulator of stock market and presents it as a commodity to a regulator of money market and so on and so forth, the definition will not merely elude a proper molecular structure but also elude regulation.

-Justice V. Ramasubramanian

IMAI vs RBI (2020)

Numerous courts in various jurisdictions have narrowed down the category of bitcoins by adopting varying approaches. The results have oscillated from “commodity” to “property” to “non-traditional currency” to “money” to “payment instruments” to “funds”. Two points must be noted with regard to such classification. Firstly, while one can accord a certain degree of truthfulness to each of these classifications, none of these can represent the whole truth to us. To draw an analogy from the Anekantavada philosophy of Jainism, every attempt by courts to characterize bitcoins into any specified category is equivalent to four blind men in a room who attempt to describe an elephant that they can touch, but because each of them touches different parts of the elephant, none can describe the animal in its entirety and everyone’s conception of what they are touching is starkly different from another. Secondly, every court does this classification in a particular context and is based on a particular set of statutes that are specific to that jurisdiction. It is entirely possible that if one replaces the statutes of one jurisdiction with another, the same court would come to a different conclusion. Therefore, no single court can, with a certain degree of absolutism and finality, declare the nature of bitcoins.

Coming to the context of GST, it is seen that when the Indian statues are applied to the present problem, one is unable to unambiguously categorize bitcoins into any of the pre-existing categories of money, security, derivative, pre-paid instrument, movable property, currency, actionable claim, service et cetera. It is best to state that bitcoins are a category in themselves. Having said this, it should be noted that nothing prevents RBI or the government from categorizing bitcoins into one of the already present categories. In fact, it is in the interest of both the government and the traders of bitcoins that legislative clarity be provided vis-à-vis the nature of bitcoins so that this cloud of legal ambiguity could be cleared and the traders could start to function with a certain degree of formal legality attached to their business and the government could start to benefit from the taxes that this hitherto unregulated industry is capable of providing.


(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) <> date of access. 

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