4. Bitcoins-A Global Perspective continue

VII. Bitcoin as a Good and a Commodity

The term commodity has not been defined anywhere under the law in India. In the case of Tata Consultancy Services V. State of Andhra Pradesh109, Hon’ble Justice Sinha concurring with the court’s view stated that a commodity is generally understood to mean goods of any kind, something of use or an article of commerce.110 Since Bitcoin are an intangible asset, it leaves open the possibility of being characterized as a commodity under Indian law. Bitcoin may very well fall under the meaning of “goods” and may be covered under the Sale of Goods Act. 

{The act defines “good” as: “every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”111} 

Bitcoin are listed and traded on stock exchanges in various jurisdictions around the world. Some examples are (i) Mt. Gox in Japan (previously one of the most widely exchanges); (ii) BTC China; (iii) BitBox in the United States;(iv) Bitcurex in Poland and (v) Bitsamp in Slovenia. Although there is no formal Bitcoin exchange in India at present there are numerous websites through which Bitcoin can be bought and sold. At present, as many as 23,000 Indians possess e-wallets where their digital currency is stored.112 

Bitcoin wallets keep a secret piece of data called a “private key” for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they have come from the owner of the addresses. Thus, it can be stated that, it can be stored and transferred. Therefore, in the light of the above discussion and case law, Bitcoin may be liable to tax. 

In Tata Consultancy Services v. State of Andhra Pradesh 113, the Supreme Court stated that, “computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (Shrink-wrapped) or uncanned (customized), whether it comes as part of computer or independently , whether it is branded or unbranded, tangible or intangible; is a commodity capable of being transmitted, transferred, delivered, stored , processed , etc. and therefore as a ‘good’ liable To sale tax.” 

Similarly, Bitcoin being of an incorporeal nature may fall under the ambit of the term “goods”.

VIII.Bitcoin as Payment System or Pre-Paid Instrument 

The RBI regulates and supervises the payment systems in India under the Payment Act. Bitcoin, though often referred to as the peer-to-peer payment system, cannot clear or settle the payment between the payer and the beneficiary. Thereby it is not to be treated as a ‘payment system’ under the Payment Act.114 

In India, pre-paid instruments are regulated by RBI in pursuant of its power conferred under the provisions of Payment Act.115 The directions issued by RBI stipulate that a pre-paid instrument can be used to discharge any payment obligation equivalent to the value attached to it.116 On the other hand, Bitcoin need not be traded to discharge payment obligations equivalent to its value. Since the value of a Bitcoin are determined by market speculation, it can be either less or more than the payment obligation it is traded for.117 Therefore, it cannot be said that the value stored in the instrument represents the value paid by the holders.

Further, Bitcoin can be generated by a user to himself by the use of software. These Bitcoin issued by the software will not fall in any of the three permitted categories of pre-paid payment instruments in India: Closed system payment instruments, Semi-closed system payment instruments and Open system payment instruments.118

The maximum value of these pre-paid payment instruments cannot exceed INR 50,000 with a minimum validity of six months from the date of activation or issuance to the holder.119 Banks that comply with the eligibility criteria are authorized to issue three kinds of pre-paid payment instruments and Non-Banking Financial Companies (“NBFC”) and other persons have been authorized to issue only semi-closed system payment instruments. This infers that the issuer of a pre-payment instrument needs to be either a bank, NBFC or a ‘person’. Therefore Bitcoin issued by the software cannot be classified as pre-paid instruments since a server or software cannot be termed as a ‘person’.120

The software further cannot be regulated within the minimum capital adequacy requirements set for issuers of pre-paid instruments as issuers require a capital of Rs.100 lakh and specific sanction from the RBI.121 Additionally, only banks which have been permitted to provide Mobile Banking Transactions by RBI are permitted to launch mobile based pre-paid payment instruments (m-wallet and m-accounts).122 Thereby rendering Bitcoin issued by a mobileapp outside the purview of regulation of pre-paid instruments as these Bitcoin are not circulated by a bank that has prior approval of the RBI. In conclusion, Bitcoin do not fall within the recognized definition of pre-paid instruments.

IX.Applicability of SCRA 

The SCRA regulates transactions relating to and involving securities. Section 2(h) of the SCRA defines “securities” to include: i. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
a. derivative;
b. units or any other instrument issued by any collective investment scheme to the investors in such schemes;
c. security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
d. units or any other such instrument issued to the investors under any mutual fund scheme;

ii. Government securities
iii.such other instruments as may be declared by the Central Government to be securities;
iv.rights or interest in securities

The first issue in this regard is that while all of the above instruments have an underlying capital asset (the assets of the company issuing them for example and hence the reference to the term “security”), there is no underlying asset in relation to Bitcoin. The second issue is that Bitcoin are not “issued” by anybody but are created from the activity of mining.

The above aspects also apply in relation to whether Bitcoin could qualify as “derivatives”. Section 2(ac) of the SCRA defines a derivative as:

i. security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; or

ii. contract which derives its value from the prices, or index of prices, of underlying securities. Since Bitcoin do not fulfil any of the above criteria, they may not qualify as a security (or a derivative) from an Indian law perspective.

The same criteria (related to an underlying security / asset) applies to a derivative as well. Accordingly, Bitcoin cannot be categorized as “derivatives”.

109. Hon’ble Mr. Justice S.B. Sinha’s view in Tata Consultancy Services v. State of Andhra Pradesh, 271 ITR 401 (2004). 

110. Section 2 of The Sale of Goods Act, 1930 

111. See, http://articles.economictimes.indiatimes.com/2013-08-14/news/41409715_1_Bitcoin-gox-virtualcurrency 

112. 271 ITR 401 (2004) (Paragraph 84) 

113. Section 2(i) of The Payment And Settlement Systems Act, 2007 reads as follows: “(i) “payment system” means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange.” 

114. Section 18 of The Payment and Settlement Systems Act, 2007 

115. Master Circular – Policy Guidelines on Issuance and Operation of Pre-paid Payment Instruments in India “2.3 Pre-paid Payment Instruments: Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card.” Available at: http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8993 

116. See, http://www.forbes.com/sites/nathanlewis/2014/03/06/Bitcoin-proves-friedmans-big-plan-was-a-joke/ 

117. See, http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1902