Is Cryptocurrency really a currency or asset for the taxing purpose in India ?

1. Introduction

• In the absence of any regulatory regime, the Indian Government is working on introducing an indirect way through GST to levy tax on crypto. India’s leading national daily the Livemint recently reported that the ministry officials are contemplating whether Crypto can be classified as good or service. As per Indian laws without proper legal definition it is not feasible for any taxing agency in India, to levy tax on Crypto and related products.

2. No tax shall be levied or collected except by authority of law.

• The article 265 of the Constitution of India says that: No tax shall be levied or collected except by authority of law. It means that taxation is an essential function of the Government of India and it cannot be determined on the basis of assumptions.
• In Vodafone International Holding Vs Union of India (CIVIL APPEAL NO.733 OF 2012) the Supreme Court of India held, that
  • 169. Power to impose tax is essentially a legislative function which finds in its expression Article 265 of the Constitution of India. Article 265 states that no tax shall be levied except by authority of law. Further, it is also well settled that the subject is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words. Viscount Simon quoted with approval a passage from Rowlatt, J. expressing the principle in the following words
  • “In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. [Cape Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt,J.)]”

3. Vague definition of Virtual Digital Asset (VDA)

• In the 2022 finance bill the Ministry of Finance made attempts to define Virtual assets/currency and consolidated all the attributes of Distributed Ledger Technology (DLT) and Blockchain like cryptocurrency and NFTs into the definition of Virtual Digital Assets (VDAs) rather than defining them separately. This definition is vague and lacks clarity as different VC/VDAs have different features and cannot be treated equally for taxation.
• For instance, Cryptocurrency is fungible in nature and its value changes as the community involved in its transaction and its worth fluctuates with increase and decrease in supply. Further, the transactions of specific crypto tokens can only take place in its restricted ecosystem (or marketplace). For example, Eutheream cannot be used for any transaction in the Bitcoin ecosystem.
• In this ecosystem, an end user requests for the token. Miners on the other end mine this request and put it in a block. These requests are stored in the cryptographic codes in the block. Another group of miners mined these codes and once found out, arranged with another block that makes blockchain. Once blockchain completes the first user receives the certain cryptographic codes called cryptocurrency.
• However, when this transaction within an ecosystem happens, crypto exchanges (entity operating/intermediaries) monetize with an increase in the cryptographic value and people who hold or invest money in tokens get a return. Careful examination of these transactions, would help us understand that crypto works like a commodity market. That’s the reason the majority of financial institutes around the world also treat cryptocurrency as a “commodity” that facilitates the user to do certain transactions in the virtual world.
• Certainly such limitations narrow the scope of cryptocurrency to qualify the current definition of “asset” and “currency”. Therefore, it may be merely considered as digital representations of value and that are capable of functioning as (i) a medium of exchange and/or (ii) a unit of account and/or (iii) a store of value. The English court also held in Kirby v Thorn EMI (1988) 2 All ER 947 that — a right to trade freely and to compete in the marketplace is not an asset.
• Whereas, NFTs are non-fungible therefore its value is intact. Due to their unique features and artistic peculiarity, the worth of NFT could increase with time. Thus, it can be considered as “capital assets” and may be subject to income tax.

4. Supreme Court of India on Cryptocurrency

• The Supreme Court of India in Internet and Mobile Association of India vs Reserve Bank of India (Writ Petition (Civil) №528 of 2018) case held that (para 6.132) “virtual currency can have a unidirectional or bidirectional flow depending upon the scheme with which the entities come up” therefore “different types of VCs require different treatments”. In Amit Bhargava Vs Union of India (W.P) Criminal 431 of 2019, the Supreme court also asked the government of India to classify the legality of Cryptocurrency in India and the government yet to give clarification on it. The Supreme Court in A. V. Fernandez vs The State Of Kerala (1957 AIR 657) held that “no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter”

5. Conclusion

• Treating cryptocurrency with other DLT based products under an umbrella term of Digital Virtual Assets is not justified and imposing taxes is a violation of law. On the other hand Crypto exchanges (entities) operating in India that offer users to invest in cryptocurrency are already subject to Good and Service taxes (GSTs) as they facilitate the buy and sell of certain commodities. To levy income tax on crypto, the government of India shall make earnest efforts to introduce a comprehensive regulatory regime to deal with nuances of crypto products. Passing such laws would give clarity to taxing agencies and investors, it will also encourage the Indian start ups to business in India with confidence.