Mining of Bitcoin
Mining should not be considered as an activity which is taxable. Considering that Bitcoin is not covered by the exception as provided above, mining should not be taxed as capital gains or business income under the ITA. However, it is possible that tax authorities will treat the income that arises on sale as taxable business income, even though it might be difficult to determine the cost
Transfer of Bitcoin
Bitcoin may either be capital asset or stock-in-trade.
Since Bitcoin is not covered by the exception, there might be some instances where the taxpayer could enjoy tax-free capital gains which arise on transfer of Bitcoin.
Ordinarily, there are no such exceptions in respect of income that arises on transfer of Bitcoin as stock-in trade.
However, deductions are permitted may be claimed on income that arises from transfer of Bitcoin as stock-in-trade.
Gains on transfer of Bitcoin as capital assets are taxed under the following two heads:
i. Long-term capital gain:
When the property is held for more than 36 months, the gains are taxed as longterm capital gains.
ii. Short-term capital gains:
Cases in which the capital asset is held for less than 36 months the gains will be taxed as short-term capital gains.
Transfer as consideration
In this case, Bitcoin represents consideration for the asset transferred / service provided and is treated as if it is currency.
The transaction will be subject to tax depending on whether the underlying asset is a capital asset or stock-intrade.
However the Bitcoin itself cannot be taxed since the Bitcoin, in this case, represent ‘currency’ and the transaction has already beensubjected to taxation (either as business income or capital gains).
Central Sales Tax / Value Added Tax
The Central Sales Tax Act, 1930 (“CST Act”) provides for the levy, collection and distribution of taxes on sales of goods in the course of inter-state trade. For a Bitcoin transaction to be taxed under the CST Act, there should be a sale – i.e., transfer of property and transfer of goods.
“Sale” is defined under Section 2(g) of the CST Act, as follows:
“sale”, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,–
i. a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
ii. a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;”
The essentials that need to be fulfilled by a transaction to be categorized as sale are:
i. Transfer of property by one person to another in goods
ii. Payment in the form of cash, deferred payments or any other valuable consideration.
Where Bitcoin is exchanged for currency or any other consideration, the above essentials of sale should be satisfied. However, it also needs to be established whether Bitcoin can be considered as ‘goods’ under the CST Act. Goods under CST act are defined as:
“goods” includes all materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities;”
As already discussed in the previous sections, Bitcoin may fall under the category of commodity and thus come under the definition of goods under the CST Act and thus fulfilling the essentials of a transaction of sale.
Similarly, Section 6 of the Maharashtra VAT Act 2002 (“MVAT Act”) provides that tax should be levied on goods mentioned in Schedule B, C, D and E of the MVAT Act. Schedule C, entry 39 includes goods of “intangible or incorporeal nature” as notified from time to time by the State Government in the Official Gazette. The State Government pursuant to the above sections has issued notifications to classify various kinds of intellectual property including patents, trademarks, copyright etc. as goods.141
However, MVAT Act clearly states that for a property to be considered as “goods” for tax purposes, it should be notified by the Government. Virtual currencies like Bitcoin have not been notified are hence should not be liable to be taxed as goods under the abovementioned provisions and consequently, transfer of Bitcoin cannot be taxed under MVAT Act.
In another situation, where Bitcoin are exchanged for goods, Bitcoin can be considered as “consideration in kind”. The definition of sale under the CST Act, as stated above, provides that a sale is said to have been made when any transfer of goods takes place for cash, deferred payment or “other valuable consideration”. However, the issue that needs to be considered is whether Bitcoin can be considered as “other valuable consideration”. Courts have, on many occasions delved into the meaning of this phrase.142 The Supreme Court in the case of Devi Das Gopal Krishna and Others v. State of Punjab143 while interpreting the same phrase in the Punjab General Sales Tax Act has opined:
“Expression “valuable consideration” in the definition of “sale” takes colour from the preceding expression “cash or deferred payment” and therefore the consideration for sale can only mean some other monetary payment in the nature of cash or deferred payment and would not comprehend a transaction in the nature of barter.”
Hence, the coverage provided by this definition is to be ascertained on case to case basis since there is no straight jacket formula to know what will constitute as “valuable consideration”.
Service Tax
Service tax is levied by the central government at 12.36% on all services provided in India except certain specified services. Service providers can take credit for service tax paid on input services utilized and for excise duty paid on inputs and capital goods (barring certain specified inputs). Services provided outside India are not subject to service tax in India. Typically, services are considered to be provided in India if the service recipient is located in India (even though the services may actually be provided outside India), except when specifically provided otherwise.144 In case of online information and database access or retrieval services, it has been specifically provided that the services would be construed to be provided at the location of the service provider.
The 2015 Budget proposes to increase the rate of service tax to from 12.36% (inclusive of cesses) to 14%.
For service tax to apply, Bitcoin needs to fall under the category of “taxable service” (charging section). “Taxable Service” is defined in Section 65(105) of the Chapter V of the Finance Tax Act, 1994. Here it may fall under Clause (zh) which states that taxable service includes services to any person, by [any person], in relation to on-line information and database access or retrieval or both in electronic form through computer network, in any manner; or Clause (zzze) stating “to its members, [or any other person], by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount”.
Therefore, the act of mining may be considered as a taxable service in terms of the clauses under the Finance Act as stated above.
Transfer of Bitcoin itself may not attract service tax since service tax is leviable on provision of services and not transfer of goods. Unless there is a service which is provided in relation to transfer of Bitcoin or mining of Bitcoin, service tax may not be levied on Bitcoin related transactions. However, Section 67 (1) (iii) contemplates receipt of consideration in kind or in some other manner which is not ‘ascertainable’ and consequently, merely because consideration has been made in the form of Bitcoin the transaction will not be exempted from service tax.
Mining should not be considered as an activity which is taxable. Considering that Bitcoin is not covered by the exception as provided above, mining should not be taxed as capital gains or business income under the ITA. However, it is possible that tax authorities will treat the income that arises on sale as taxable business income, even though it might be difficult to determine the cost
Transfer of Bitcoin
Bitcoin may either be capital asset or stock-in-trade.
Since Bitcoin is not covered by the exception, there might be some instances where the taxpayer could enjoy tax-free capital gains which arise on transfer of Bitcoin.
Ordinarily, there are no such exceptions in respect of income that arises on transfer of Bitcoin as stock-in trade.
However, deductions are permitted may be claimed on income that arises from transfer of Bitcoin as stock-in-trade.
Gains on transfer of Bitcoin as capital assets are taxed under the following two heads:
i. Long-term capital gain:
When the property is held for more than 36 months, the gains are taxed as longterm capital gains.
ii. Short-term capital gains:
Cases in which the capital asset is held for less than 36 months the gains will be taxed as short-term capital gains.
Transfer as consideration
In this case, Bitcoin represents consideration for the asset transferred / service provided and is treated as if it is currency.
The transaction will be subject to tax depending on whether the underlying asset is a capital asset or stock-intrade.
However the Bitcoin itself cannot be taxed since the Bitcoin, in this case, represent ‘currency’ and the transaction has already beensubjected to taxation (either as business income or capital gains).
Central Sales Tax / Value Added Tax
The Central Sales Tax Act, 1930 (“CST Act”) provides for the levy, collection and distribution of taxes on sales of goods in the course of inter-state trade. For a Bitcoin transaction to be taxed under the CST Act, there should be a sale – i.e., transfer of property and transfer of goods.
“Sale” is defined under Section 2(g) of the CST Act, as follows:
“sale”, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,–
i. a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
ii. a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;”
The essentials that need to be fulfilled by a transaction to be categorized as sale are:
i. Transfer of property by one person to another in goods
ii. Payment in the form of cash, deferred payments or any other valuable consideration.
Where Bitcoin is exchanged for currency or any other consideration, the above essentials of sale should be satisfied. However, it also needs to be established whether Bitcoin can be considered as ‘goods’ under the CST Act. Goods under CST act are defined as:
“goods” includes all materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities;”
As already discussed in the previous sections, Bitcoin may fall under the category of commodity and thus come under the definition of goods under the CST Act and thus fulfilling the essentials of a transaction of sale.
Similarly, Section 6 of the Maharashtra VAT Act 2002 (“MVAT Act”) provides that tax should be levied on goods mentioned in Schedule B, C, D and E of the MVAT Act. Schedule C, entry 39 includes goods of “intangible or incorporeal nature” as notified from time to time by the State Government in the Official Gazette. The State Government pursuant to the above sections has issued notifications to classify various kinds of intellectual property including patents, trademarks, copyright etc. as goods.141
However, MVAT Act clearly states that for a property to be considered as “goods” for tax purposes, it should be notified by the Government. Virtual currencies like Bitcoin have not been notified are hence should not be liable to be taxed as goods under the abovementioned provisions and consequently, transfer of Bitcoin cannot be taxed under MVAT Act.
In another situation, where Bitcoin are exchanged for goods, Bitcoin can be considered as “consideration in kind”. The definition of sale under the CST Act, as stated above, provides that a sale is said to have been made when any transfer of goods takes place for cash, deferred payment or “other valuable consideration”. However, the issue that needs to be considered is whether Bitcoin can be considered as “other valuable consideration”. Courts have, on many occasions delved into the meaning of this phrase.142 The Supreme Court in the case of Devi Das Gopal Krishna and Others v. State of Punjab143 while interpreting the same phrase in the Punjab General Sales Tax Act has opined:
“Expression “valuable consideration” in the definition of “sale” takes colour from the preceding expression “cash or deferred payment” and therefore the consideration for sale can only mean some other monetary payment in the nature of cash or deferred payment and would not comprehend a transaction in the nature of barter.”
Hence, the coverage provided by this definition is to be ascertained on case to case basis since there is no straight jacket formula to know what will constitute as “valuable consideration”.
Service Tax
Service tax is levied by the central government at 12.36% on all services provided in India except certain specified services. Service providers can take credit for service tax paid on input services utilized and for excise duty paid on inputs and capital goods (barring certain specified inputs). Services provided outside India are not subject to service tax in India. Typically, services are considered to be provided in India if the service recipient is located in India (even though the services may actually be provided outside India), except when specifically provided otherwise.144 In case of online information and database access or retrieval services, it has been specifically provided that the services would be construed to be provided at the location of the service provider.
The 2015 Budget proposes to increase the rate of service tax to from 12.36% (inclusive of cesses) to 14%.
For service tax to apply, Bitcoin needs to fall under the category of “taxable service” (charging section). “Taxable Service” is defined in Section 65(105) of the Chapter V of the Finance Tax Act, 1994. Here it may fall under Clause (zh) which states that taxable service includes services to any person, by [any person], in relation to on-line information and database access or retrieval or both in electronic form through computer network, in any manner; or Clause (zzze) stating “to its members, [or any other person], by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount”.
Therefore, the act of mining may be considered as a taxable service in terms of the clauses under the Finance Act as stated above.
Transfer of Bitcoin itself may not attract service tax since service tax is leviable on provision of services and not transfer of goods. Unless there is a service which is provided in relation to transfer of Bitcoin or mining of Bitcoin, service tax may not be levied on Bitcoin related transactions. However, Section 67 (1) (iii) contemplates receipt of consideration in kind or in some other manner which is not ‘ascertainable’ and consequently, merely because consideration has been made in the form of Bitcoin the transaction will not be exempted from service tax.
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