GST IMPLICATIONS OF EXCHANGE OF CRYPTOCURRENCY WITHREGULAR CURRENCY – WHAT IT IS; WHAT IT SHOULD BE

[Dhanush Thonaparthi]

Cryptocurrency is the next step in the evolution of currency, revolutionizing how we think about money. It is cheaper and more secure than traditional currencies, making it easier for people to do business across borders while remaining insulated from government manipulation or inflation.
The rise of cryptocurrency begs inquiries. Do we tax it? How do we tax it? Is it a currency or an asset? Given the novelty of cryptocurrencies, the policy surrounding their taxation is ever-evolving.

In this article, we first understand cryptocurrency and what GST rates it will attract when exchanged with fiat currencies, considering how cryptocurrencies are virtual digital assets. Subsequently, we examine the GST implications of reclassifying cryptocurrency as a
currency.

What is cryptocurrency?

Cryptocurrency is a digital and virtual currency that uses cryptography to secure transactions. Cryptography allows cryptocurrency transactions to be anonymous and secure.

Bitcoin was the first cryptocurrency launched in January 2009. Crypto transactions, being cheaper and more secure than regular transactions, gained popularity, primarily through the crypto boom in 2017, which drew enthusiasts and critics alike.

Nearly twenty-three thousand cryptocurrencies are in circulation, with a total market capitalization of $1.1 trillion. Nearly $ 8.2 trillion worth of transactions used Bitcoin alone, indicating the massive scale of cryptocurrencies.

Is cryptocurrency sold for fiat currency or exchanged for fiat currency? Current position in the law and GST implications

In India, the Reserve Bank of India (RBI) has declared that cryptocurrencies are virtual digital assets instead of classifying them as a currency. A consequence of such a classification is that exchanging cryptocurrency with fiat currencies will attract GST as the transaction will be considered a sale of a good.
The next step is determining the GST rate levied on the exchange of cryptocurrency with fiat currency. While there is no HSN code and rate for virtual digital assets, it can be classified under HSN code 960899, named ‘other miscellaneous article’, attracting a minimum GST rate of 18%.

Problems with such application of GST.

Simply put, cryptocurrency is incorrectly classified as an asset.
As per universally accepted definitions, a currency is a medium of exchange, a unit of account and a store of value. A secondary characteristic of currency is its legislative recognition, which gives it the status of a legal tender for transactions, whose circulation and method of use are regulated by the government.
Cryptocurrency fulfills the primary prerequisites required to make it a currency.
It is a medium of exchange. Many businesses accept cryptocurrency as payment for the supply of their goods or services, sometimes offering discounts for using it. While cryptocurrency is not a widely accepted compensation mode, it is gaining traction with increasing recognition.

It is a unit of account. Almost anything can be used to measure the value of goods and services. Varying quantities of gold can be used to determine the value of anything from a pen to a mansion. Similarly, a unit of cryptocurrency can. In terms of the Indian rupee, as of 9th September 2023, bitcoin has a value of Rs 21,51,432.

It is a store of value. Cryptocurrency has an intrinsic value, derived from the mining process which uses massive amounts of computing power to solve complicated mathematical problems to generate cryptocurrency coins. In other words, the intrinsic value of crypto is decided based on how it is generated, which involves skill and computational power. 

Consumer demand and willingness to pay a particular amount are among the metrics to ascertain such value.
Internationally, El Salvador was the first to make Bitcoin a legal tender; other countries will likely follow suit.

While there are dedicated crypto currency exchanges for cryptocurrency trading, it is just as accurate that even foreign currencies are traded through forex trade centers. Nevertheless, this has not and does not alter the nature of the foreign currencies so traded, to consider them
‘assets’.

Way forward?

For a transaction to attract a levy of GST under ordinary slabs there must be a supply of a good or service in the given transaction. The definitions of both goods and services under the CGST Act 2017 exclude ‘money’ from their definition. This has the effect of excluding all exchanges of currencies from the scope of applicability of GST.

Section 2(75) of the Act, defines money as any instrument recognised by the RBI and is used as consideration to settle an obligation or exchange with Indian legal tender of another denomination.

The first step is for cryptocurrency to gain the status of a currency, for which the RBI must designate cryptocurrency as a currency instead of treating it as a virtual digital asset. Once designated, it will be treated as ‘money’ as defined under Section 2(75) of the Act. Consequently, when exchanged with fiat currency, it will not be treated as a supply of a good or service and it will not attract the ordinary tax slabs under GST.

The second step is to look at whether there is any other liability under GST, even if there is no supply of a good or service.

As per Section 2(q) of the Foreign Exchange and Management (FEMA) Act 1999, an Indian currency is anything expressed or drawn in Indian rupees. A cryptocurrency is generally not expressed or drawn in Indian rupees.
Section 2(m) of the FEMA Act provides that foreign currency is any currency other than Indian currency. If RBI were to notify cryptocurrency as a currency, as recommended in the first step, cryptocurrencies would become foreign currencies.
The next step is to look at the applicability of GST in case of exchange of foreign currencies. For this, we can refer to Rule 32(2) of the CGST Rules 2017 which provides the amount and percentage of GST to be levied in case of foreign currency exchanges. The following table
provides a summary of the same.

Gross amount of currency exchanged	Value of service on which GST to be paid
Less than or equal to Rs.1,00,000	1% if the gross currency exchanged, subject to a minimum of Rs 250. In essence, the minimum GST payable is Rs. 45
Greater than Rs 1,00,000 and less than or equal to Rs10,00,000	Rs 1000 plus 0.5% of the gross amount of currency exchanged
Greater than Rs10,00,000	Rs 5500 plus an additional 0.1% of the gross amount of currency exchanged, subject to a maximum of Rs 60,000, capping the payable GST amount at Rs 10,800.

From this, we see that cryptocurrency is still liable to GST under the GST rules, but the rate of taxation is nominal compared to the GST rate it would have attracted were it classified as an asset or a good under GST.

Conclusion

The article, when evaluating the applicability of GST on an exchange of cryptocurrency with fiat currency, takes the unconventional stance that cryptocurrency must be classified as a currency, replacing its current classification as a digital currency. The argument stems from the primary use envisioned for cryptocurrency to serve as a currency  and how Indian laws must take the same stance.

Consequently, upon reclassification of cryptocurrency as a currency for GST, we have seen the GST consequences of exchanging cryptocurrency with fiat currency on the understanding that cryptocurrency is a foreign currency duly recognised by the RBI as currency.