Cross border transfer of
Bitcoin
FEMA regulates all inbound and outbound foreign exchange related transactions, in effect regulating (or managing) the capital flows coming into and moving out of the country. Section 3 of FEMA states that other than as provided (and specifically enunciated) in either FEMA (or its underlying rules and regulations) or unless special or general permission of RBI has been obtained, no person shall:
‘deal in or transfer any foreign exchange or foreign security to any person not being an authorized person ; 134
i. make any payment to or for the credit of any person resident outside India in any manner;
ii. receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; and
iii.enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.’
From the above, it could be argued that purchasing of Bitcoin by a resident Indian from a person resident outside India (where money for purchase of Bitcoin is transmitted through legitimate banking channels) will not be in violation of FEMA. Further, Bitcoin transaction between two residents should also not trigger FEMA and should not therefore be in violation of the same. However, the sale of Bitcoin to a non-resident person (i.e. to a person outside India) by a resident Indian will be in violation of the provisions of FEMA. Further, it can also be regulated by RBI in this condition.
III.Taxation of Bitcoin
In India, taxes are levied either by the central and the state governments. Article 246 of the Indian Constitution confers powers related to legislation of tax rules to state as well as central legislatures. Schedule VII enumerates these subject matters in 3 separate lists.135 Taxes may be on income or expenditure. When taxation is on income, it may be on Bitcoin representing such income or on Bitcoin representing asset value. Additionally, it may also be on expenditure – cost of acquiring Bitcoin, such as Central Sales Tax, Value-Added Tax or Service Tax. For the purpose of taxation, three possible scenarios emerge:
i. mining of Bitcoin (similar to self-generated goodwill),
ii. transfer of Bitcoin (where Bitcoin are either a capital asset or a stock-in-trade depending on the activity undertaken by the tax payer), and,
iii.transfer of Bitcoin as consideration (where Bitcoin are either a capital asset or a stock-in-trade depending on the activity undertaken by the tax payer).
Income Tax
Taxation of income in India is governed by the provisions of the Income Tax Act, 1961 (“ITA”). Under the ITA, residents are subject to tax in India on their worldwide income, whereas non-residents are taxed only on income sourced in India. However, non-residents, who are resident of a country with which India has signed a tax treaty, have the option of being taxed as per the tax treaty or the ITA whichever is more beneficial. Every person, who is an assessee136 and whose total income exceeds the maximum exemption limit, should be chargeable to the income tax at the rates prescribed.
Bitcoin may be considered to be currency or a capital asset. However, this is not yet clear under Indian law which makes it difficult to conclude how it may be taxed. The following discussion considers the tax implications on Bitcoin related transactions under the Indian Income tax law.
V. Currency
Although for the purpose of general regulatory and commercial laws, Bitcoin may not be treated as currency, the income tax authorities may still treat Bitcoin as currency for the purpose of taxation. In such a case, Bitcoin are to be treated as consideration and the tax implication is not on Bitcoin but the transaction itself. For instance, if the seller is a regular trader, the income should be considered as business income at the rate of 30%. If not business income, such income would be in the nature of capital gain.
Under Indian law when a capital asset is transferred, the profit/gain that arises out of such transfer is taxable as income.137 The tax liability, when such a transfer is made, is calculated by deducting the cost of acquisition of the capital asset from the sale proceeds and applying the tax rate to the difference.138 According to the Supreme Court, it is required that the income be both “computable as well as chargeable” under the provisions of the ITA for capital gains to be taxable in India.139 A study of recent case laws reveals that it has been held consistently by the Indian courts that the “computation” machinery as provided under the ITA is inextricably linked with the chargeability of tax on capital gains. It has also been held that, if in a particular case, the computation provisions cannot be applied, it is suggestive of the fact that it was not in the contemplation of the charging section and consequently, when the computation provision fails, no tax can be levied.137
An amendment was made to the ITA to specify that in relation to a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing, the cost of acquisition should be considered to be the following:
i. the amount of the purchase price in the case of acquisition of such asset by way of purchase from a previous owner; and
ii. nil in all other cases.140
Hence, the entire sale proceeds will attract capital gains tax levy, where the cost of acquisition is nil.
Bitcoin however is not covered by this exception. Thus, there might be some instances where the taxpayer could enjoy tax-free income. But in cases where the Bitcoin have been mined, it is possible that authorities will treat income of sale as taxable business income, even though it might be difficult to determine the cost.
FEMA regulates all inbound and outbound foreign exchange related transactions, in effect regulating (or managing) the capital flows coming into and moving out of the country. Section 3 of FEMA states that other than as provided (and specifically enunciated) in either FEMA (or its underlying rules and regulations) or unless special or general permission of RBI has been obtained, no person shall:
‘deal in or transfer any foreign exchange or foreign security to any person not being an authorized person ; 134
i. make any payment to or for the credit of any person resident outside India in any manner;
ii. receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; and
iii.enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.’
From the above, it could be argued that purchasing of Bitcoin by a resident Indian from a person resident outside India (where money for purchase of Bitcoin is transmitted through legitimate banking channels) will not be in violation of FEMA. Further, Bitcoin transaction between two residents should also not trigger FEMA and should not therefore be in violation of the same. However, the sale of Bitcoin to a non-resident person (i.e. to a person outside India) by a resident Indian will be in violation of the provisions of FEMA. Further, it can also be regulated by RBI in this condition.
III.Taxation of Bitcoin
In India, taxes are levied either by the central and the state governments. Article 246 of the Indian Constitution confers powers related to legislation of tax rules to state as well as central legislatures. Schedule VII enumerates these subject matters in 3 separate lists.135 Taxes may be on income or expenditure. When taxation is on income, it may be on Bitcoin representing such income or on Bitcoin representing asset value. Additionally, it may also be on expenditure – cost of acquiring Bitcoin, such as Central Sales Tax, Value-Added Tax or Service Tax. For the purpose of taxation, three possible scenarios emerge:
i. mining of Bitcoin (similar to self-generated goodwill),
ii. transfer of Bitcoin (where Bitcoin are either a capital asset or a stock-in-trade depending on the activity undertaken by the tax payer), and,
iii.transfer of Bitcoin as consideration (where Bitcoin are either a capital asset or a stock-in-trade depending on the activity undertaken by the tax payer).
Income Tax
Taxation of income in India is governed by the provisions of the Income Tax Act, 1961 (“ITA”). Under the ITA, residents are subject to tax in India on their worldwide income, whereas non-residents are taxed only on income sourced in India. However, non-residents, who are resident of a country with which India has signed a tax treaty, have the option of being taxed as per the tax treaty or the ITA whichever is more beneficial. Every person, who is an assessee136 and whose total income exceeds the maximum exemption limit, should be chargeable to the income tax at the rates prescribed.
Bitcoin may be considered to be currency or a capital asset. However, this is not yet clear under Indian law which makes it difficult to conclude how it may be taxed. The following discussion considers the tax implications on Bitcoin related transactions under the Indian Income tax law.
V. Currency
Although for the purpose of general regulatory and commercial laws, Bitcoin may not be treated as currency, the income tax authorities may still treat Bitcoin as currency for the purpose of taxation. In such a case, Bitcoin are to be treated as consideration and the tax implication is not on Bitcoin but the transaction itself. For instance, if the seller is a regular trader, the income should be considered as business income at the rate of 30%. If not business income, such income would be in the nature of capital gain.
Under Indian law when a capital asset is transferred, the profit/gain that arises out of such transfer is taxable as income.137 The tax liability, when such a transfer is made, is calculated by deducting the cost of acquisition of the capital asset from the sale proceeds and applying the tax rate to the difference.138 According to the Supreme Court, it is required that the income be both “computable as well as chargeable” under the provisions of the ITA for capital gains to be taxable in India.139 A study of recent case laws reveals that it has been held consistently by the Indian courts that the “computation” machinery as provided under the ITA is inextricably linked with the chargeability of tax on capital gains. It has also been held that, if in a particular case, the computation provisions cannot be applied, it is suggestive of the fact that it was not in the contemplation of the charging section and consequently, when the computation provision fails, no tax can be levied.137
An amendment was made to the ITA to specify that in relation to a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing, the cost of acquisition should be considered to be the following:
i. the amount of the purchase price in the case of acquisition of such asset by way of purchase from a previous owner; and
ii. nil in all other cases.140
Hence, the entire sale proceeds will attract capital gains tax levy, where the cost of acquisition is nil.
Bitcoin however is not covered by this exception. Thus, there might be some instances where the taxpayer could enjoy tax-free income. But in cases where the Bitcoin have been mined, it is possible that authorities will treat income of sale as taxable business income, even though it might be difficult to determine the cost.
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