NUJS Law Review 10 NUJS L. Rev.

3 (2017)

REINVENTING REGULATION: THE CURIOUS CASE OF

TAXATION OF CRYPTOCURRENCIES IN INDIA

Hatim Hussain
Nearly twenty-five years ago, the internet disrupted the world and started a new era of technological
supremacy. Today, with the rise of cryptocurrencies and its underlying technology, we stand at the helm
of another such revolution. Cryptocurrencies like bitcoin are decentralised, digital currencies relying on
a peer-to-peer network which operates without the need for a third-party intermediary like the Reserve
Bank of India. Coupled with lack of regulatory guidance, its unique technical aspects create huge
complications in its taxation. While much ignorance still prevails in respect of cryptocurrencies,
countries around the world have finally started taking notice and acting upon it. This paper focuses on
what cryptocurrencies are, why they are important, and the prevailing regulatory structure concerning
them. It overviews the complete landscape for taxation of cryptocurrencies like bitcoin, analysing the
indirect and direct tax structure, particularly after the implementation of Central Goods and Services Tax
Act, 2017, while also addressing the issues concerning the evasionary practices. The findings help in
assessing the regulatory aspects in light of the technological, economic, social and financial forces, and
establishing a set framework for taxation of cryptocurrencies.

Table of Contents

I. Introduction............................................................................................................................. 2
II. Mechanics of Bitcoin............................................................................................................... 4
A. Overview........................................................................................................................... 4
B. How Bitcoin Works........................................................................................................... 5
C. Issues Regarding Usage ................................................................................................... 6
III. Present Regulatory Mechanism in India.............................................................................. 7
A. Overview........................................................................................................................... 7
B. Bitcoin: What is it? ........................................................................................................... 9
C. Bitcoins As Securities, Derivatives................................................................................. 10
IV. Taxation f Cryptocurrencies .............................................................................................. 11
A. Treatment under Indirect Tax ........................................................................................ 11
1. Mining of Bitcoins: Service? .......................................................................................... 15
B. Treatment under Direct Tax ........................................................................................... 16
1. Treatment under The Head ‘Capital Gains’ .................................................................. 16


3rd year B.Com LL.B.(Hons.) student at Gujarat National Law University, Gandhinagar. I'd like to thank the
editorial team at NUJS Law Review for providing valuable inputs. All errors however, remain solely attributable to
me.

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

2. Taxability under “Profit And Gains From Business And Profession’ ........................... 18
C. Tax Evasion and Illicit Activities- .................................................................................. 19
V. Evolving International Practices .......................................................................................... 22
VI. Conclusion ......................................................................................................................... 25

I. INTRODUCTION

“For in every country of the world, I believe, the avarice and injustice of princes and sovereign
states abusing the confidence of their subjects, have by degrees diminished the real quality of the
metal, which had been originally contained in their coins.”1

Nassim Taleb in his book ‘The Black Swan’, defines a black swan as an outlier
with massive impact, which seems highly improbable until it occurs, but more predictable after
its rise.2 There is little doubt that cryptocurrencies are possibly the next black swan – a
laughingly impossible event, akin to the industrial revolution, or paradoxically, even the great
depression. In fact, the rise of digital currencies as the next generation currency has already
garnered attention across the globe, and lately in India.3 Recently, the Government of India
established an interdisciplinary committee consisting of, inter alia, the NITI Aayog and the
Reserve Bank of India (‘RBI’), to consider the framework surrounding digital currencies in
India.4
As of 2017, there exist several hundreds of cryptocurrencies in function, the most
popular of them being ‘bitcoin’.5 Since its inception in November, 2008, bitcoin has shown
immense promise as an alternative to the traditional methods of monetary exchange. Bitcoin is
the world’s first private, digital cryptocurrency that functions solely on the basis of peer-to-peer
network.6 However, buying and selling is usually done through centralised bitcoin exchanges
functioning in a manner akin to regular stock exchanges. Touted as the next revolution after the
internet,7 its advantages have led it to become one of the most acceptable digital currencies in the
1
ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 43 (1776); See generally
F.A. HAYEK, DENATIONALISATION OF MONEY - THE ARGUMENT REFINED (3rd ed., 1990).
2
NASSIM NICHOLAS TALEB, THE BLACK SWAN: THE IMPACT OF HIGHLY IMPROBABLE 18 (1st ed., 2007).
3
Keerthik Sasidharan, Cryptocurrency: An Idea Whose Time Has Come, June 4, 2017, available at
http://www.thehindu.com/opinion/columns/cryptocurrency-an-idea-whose-time-has-come/article18714908.ece (Last
visited on June 10, 2017).
4
Vikas Dhoot, Waking up to Bitcoins, Virtual Currencies, Govt Sets up Panel to Recommend Regulations, April 12,
2017, available at http://www.thehindu.com/business/Economy/waking-up-to-bitcoins-virtual-currencies-govt-sets-
up-panel-to-recommend-regulations/article17951305.ece (Last visited on May 15, 2017).
5
Coin Market Cap, Cryptocurrency Market Capitalizations, available at https://coinmarketcap.com (Last visited on
July 5, 2017).
6
Satoshi Nakamuto, Bitcoin: A Peer-to-Peer Electronic Cash System, 1–5, available at
https://bitcoin.org/bitcoin.pdf (Last visited on March 13, 2017).
7
Peter Spence, Bitcoin Revolution Could be the Next Internet, February 25, 2015, available at
http://www.telegraph.co.uk/finance/currency/11434904/Bitcoin-revolution-could-be-the-next-internet-says-Bank-of-
England.html (Last visited on June 4, 2017); Ken Tindell, Geeks Love The Bitcoin Phenomenon Like They Loved
The Internet In 1995, April 5, 2013, available at http://www.businessinsider.com/how-bitcoins-are-mined-and-used-
2013-4?IR=T (Last visited on June 3, 2017).

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world, with countries such as Philippines, Japan, and recently even Russia, a country who had
earlier sought prison terms for bitcoin adapters, acknowledging its role in the banking system
and seeking to enforce regulations to govern it.8 Indeed, the growth of bitcoins has tremendous
benefits in making banking accessible to marginalised population without a need for third party
intervention.9
While there is no legal definition for ‘cryptocurrency’, the Oxford Dictionary
defines ‘cryptocurrency’ as follows:
“A digital currency in which encryption techniques are used to regulate the generation of units of
currency and verify the transfer of funds, operating independently of a central bank.”10
At present, most countries in the world function on fiat currencies issued by the
government as money and possessing value by virtue of a government decree. 11 A prime
essential of these currencies is that they need a central regulatory body to govern them, meaning
thereby that the value is derived in some abstract manner from the sovereign authority of the
state.12 However, such a system suffers from the intrinsic weaknesses of the trust-based model,
with huge dependence on financial institutions to process payments.13 Cryptocurrencies, on the
other hand, use cryptography to manage the creation of new units and secure transactions. 14 They
offer ‘crypto proof’ as an alternative to trust and allow two parties to transact with each other
securely, without a need for a trusted third party.15 The value of such currency is not derived
from government fiat or gold, but is based on the value that people assign it.16
Broadly, there can be two defining features of cryptocurrencies – (i)
decentralisation and (ii) absence of intermediaries.17 The essential advantage of digital currencies
like bitcoin is that they function entirely on the basic principle of demand and supply, having no

8
Jens Kalaene, Russia to End Cryptocurrency Limbo by Proposing Regulation, September 25, 2017, available at
https://www.rt.com/business/404468-russia-bitcoin-bill-regulation/ (Last visited on September 25, 2017).
9
Brett Scott, How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity
Finance? 5-13 (United Nations Research Institute for Social Development Working Paper Group, Paper No. 2016-1,
2016) available at http://www.unrisd.org/brett-scott (Last visited on September 30, 2017); See Nicholas A.
Plassaras, Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF, 14 CHICAGO JOURNAL OF
INTERNATIONAL LAW 378-407 (2013) (This paper talks abot the benefits of digital currencies).
10
Oxford Dictionaries, Cryptocurrency, available at https://en.oxforddictionaries.com/definition/cryptocurrency
(Last visited on July 24, 2017).
11
Abba P. Lerner, Money as a Creature of State, 37 THE AMERICAN ECONOMIC REVIEW 2 (1947).
12
Id., 313 (Historically, the value of fiat currencies was derived from the ability of the government to redeem such
currencies in gold or other commodities. However, in modern times, the state can make almost anything generally
acceptable as money by attaching a contractual obligation to it, therefore being a ‘creator of money’); See B.M.
ANDERSONJR., THE VALUE OF MONEY (1917).
13
Nakamuto, supra note 6, ¶1.
14
Andy Greenberg, Crypto Currency, April 20, 2011, available at
https://www.forbes.com/forbes/2011/0509/technology-psilocybin-bitcoins-gavin-andresen-crypto-currency.html
(Last visited on May 23, 2017).
15
Nakamuto, supra note 6, ¶2.
16
JERRY BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS 29 (4th ed., 2013).
17
Here, I talk about the original P2P network on which the regular bitcoin exchanges are based, hence noting its
essential characteristics. Since any cryptocurrency can function without intermediaries, the presence of companies
like Zebpay, Unocoin, etc. is only a systematised effort to enable efficient P2P and their absence would not debar
bitcoins from functioning.

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

intrinsic value and no reserves.18 Thus, they offer a near-perfect system to transact, with
anonymity and transparency at the same time. Nonetheless, it is also true that the very same
qualities that make bitcoin attractive could also allow users to evade taxes, launder money and
trade illegal goods.19
Through this paper, I attempt to posit and analyse the perplexing aspects of taxes
that may apply to the transactions in cryptocurrencies, specifically bitcoin. Such pre-emptive
analysis is desirable, as legislation must, to the utmost extent, be predictive of innovation. Since
the core structure of all cryptocurrencies, i.e. ‘blockchain’, is the same, the terms
‘cryptocurrencies’ and ‘bitcoins’ are often used interchangeably in this paper, and tax treatments
of one may as well be applied to another.20 This paper is divided into six parts. Part I deals with
the background. Part II considers the technical aspects relating to use of cryptocurrencies. Part III
discusses, in brief, the present regulatory mechanisms governing cryptocurrencies. In part IV, the
indirect and direct tax frameworks have been dealt with in detail. Part V focuses on the evolving
international practices. Finally, Part VI provides conclusion and recommendations.

II. MECHANICS OF BITCOIN

A. OVERVIEW

The rise of virtual currencies is not a new phenomenon, with origins as early as
1990s. E-cash or digital cash as anonymous electronic money was first published by David
Chaum in 1983.21 Surprisingly, twelve years before the publication of the white paper on
cryptocurrency by Satoshi Nakamuto in 1996, a group of National Security Agency analysts in
the United States of America had published a paper on the cryptography of anonymous
electronic cash.22 Adam Back’s Hashcash in 1997,23 and Wei Dei’s b-money in 1998,24 give
glimpses into the perpetual need to have a currency where the involvement of the government is
“not temporarily destroyed but permanently forbidden and permanently unnecessary.”25

18
International Monetary Fund, Virtual Currencies and Beyond: Initial Considerations, available at
https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf (Last visited on September 25, 2017).
19
BRITO & CASTILLO, supra note 16, ¶2.
20
The common element in all major cryptocurrencies is the blockchain or the public ledger, also the core structure
of these currencies, which allows the network participants to run the network in the absence of a central authority.
However, the difference lies with respect to the level of innovation in such currencies such as different block time,
supply structure, issuance schemes etc. See Garrick Hileman & Michel Rauchs, Global Cryptocurrency
Benchmarking Study, available at https://cointelegraph.com/storage/uploads/view/2017-global-cryptocurrency-
benchmarking-study.pdf (Last visited on September 26, 2017); Jean-Paul Delahaye, Cryptocurrencies and
Blockchains, 2 INFERENCE INTERNATIONAL REVIEW OF SCIENCE 4 (2016).
21
David Chaum, Blind Signatures for Untraceable Payments, 82 ADVANCES IN CRYPTOLOGY PROCEEDINGS 199–
203 (1983),
22
Laurie Law, Susan Sabett & Jerry Solinas, How To Make A Mint: The Cryptography Of Anonymous Electronic
Cash, 46 THE AMERICAN UNIVERSITY LAW REVIEW 4 (1997).
23
Adam Back, Hashcash — A Denial of Service Counter-Measure, available at
http://www.hashcash.org/papers/hashcash.pdf (Last visited on June 14, 2017).
24
Wei Dei, B Money, available at http://www.weidai.com/bmoney.txt (Last visited on April 13, 2017).
25
Id., ¶2.

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While much discussion has been held on the importance of bitcoins, or other
cryptocurrencies as the future of conventional monetary exchange,26 discussion on its mechanics
is not within the scope of this paper. However, an analysis of tax aspects requires us to delve into
some depth and understand, to the very least, the functioning of it. To a layman, bitcoin is an
electronic currency capable of being generated and stored digitally. It is transacted in the same
way as an ordinary currency, except it does not enjoy the backing of the government.
B. HOW BITCOIN WORKS

Bitcoins are nothing but computer files comprising of data, similar to media or a
text file. These bitcoins are generated through a process called ‘mining’. 27 In this process, a
miner using software running on specialised hardware, processes the transactions.28 Consider a
bitcoin as a hidden gem, which is required to be quarried in order for its value to be exploited. In
that sense, ‘mining’ of bitcoins is akin to discovering new bitcoins. In order to track transactions
occurring with this currency, bitcoins rely on a peer to peer network.29 Hence, every activity
occurring should be transmitted by a node to its neighbours in the network.30 When a transaction
is done by the user, the node that receives the transaction verifies the authenticity of the
transaction by the person attempting the transfer following which it attempts to authorise the
problem by solving a puzzle (in cryptography terms — inverting the hash function).31 After the
authorisation is done, a proof of transaction is sent to the other nodes in the network.32 This
process of verification of ingenuity of bitcoin transactions is referred to as mining.33 As a reward
for authorising the transaction, each node receives certain bitcoins, the amount of which is
predetermined.34

Mining is typically a mathematical process, with each corresponding process

difficult than the former.35 By design, the total number of bitcoins expected to be created overall
is twenty-one million.36 This process is similar to finding prime numbers in a set of rational
numbers, where even though it is easier to find smaller prime numbers, the trouble keeps
increasing as we move towards finding larger prime numbers, hence requiring more efforts.
Given this rising rate of difficulty in mining bitcoins and a fixed timescale (all bitcoins would be

26
See Chris Richter, Sascha Kraus & Ricarda B. Bouncken, Virtual Currencies Like Bitcoin as A Paradigm Shift in
The Field of Transactions, 14 INTERNATIONAL BUSINESS & ECONOMICS RESEARCH JOURNAL (2015).
27
The Economist, How Bitcoin Mining Works, January 20, 2015, available at
https://www.economist.com/blogs/economist-explains/2015/01/economist-explains-11 (Last visited on September
26, 2017).
28
See Allison Berke, How Safe Are Blockchains? It Depends, March 7, 2017, available at
https://hbr.org/2017/03/how-safe-are-blockchains-it-depends (Last visited on September 26, 2017).
29
Moshe Babaioff, On Bitcoin and Red Balloons, February, 2012, available at https://www.microsoft.com/en-
us/research/wp-content/uploads/2012/06/bitcoin.pdf (Last visited on July 3, 2017).
30
Id., ¶3.
31
Id.
32
Bitcoin, Frequently Asked Questions, available at https://bitcoin.org/en/faq#what-is-bitcoin (Last visited on March
6, 2017).
33
Id.
34
Id.
35
DAVID LEE KUO CHUEN, HANDBOOK OF DIGITAL CURRENCY - BITCOIN, INNOVATION, FINANCIAL INSTRUMENTS,
AND BIG DATA 29 (6th ed., 2015).
36
Venzen Khaosan, What Affects the Bitcoin Price?, September 25, 2014, available at
https://www.cryptocoinsnews.com/affects-bitcoin-price (Last visited on July1, 2017).

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mined in the next ninety five-years approximately), the supply of bitcoins is generally assumed
to be constant.37 Due to the constant supply and increasing demand, the price gradually goes up,
explaining the increase in bitcoin to United States Dollar exchange rate over the course of time
(BTC/USD around USD 4900 as on September 1, 2017).38
When a transaction is carried out by a user, it is confirmed and locked with a
virtual padlock forming ‘blockchain’ – a decentralised public ledger that records such
transfers.39A new bitcoin is generated when the key to these padlocks (also called as ‘Hash’) is
found by the miners and the authenticity of the transaction is verified and checked.40 Once such
bitcoin is produced, it can then be traded for real currency based on the prevailing exchange
value, and is then transferred into the wallet of the purchaser.41 The owner of the wallet usually
has two keys – a public key which is available with everybody and can be used to track the
wallet’s activity online; and a private key available only with the owner which is required to
complete the transaction.42
As stated earlier, to ensure that new bitcoins are generated progressively, the
incentive to miners to successfully solve a block is halved every four years, and the difficulty
gradually increases. The entire design is such that the production of most cryptocurrencies is set
to gradually decrease, eventually placing a cap on the number of units that will ever be in
circulation.43 The whole system is considered impenetrable and highly secure. As stated by
Nakamuto himself, verification is reliable as long as honest nodes control the network, and
security is achieved unless the network is overpowered by the attacker.44
C. ISSUES REGARDING USAGE

Theoretically, the use of bitcoins, by and large, raises the same issues as those in
normal currencies – (i) privacy and (ii) counterfeiting.45 The issue of privacy is resolved through
the use of public-key encryption, a technique where two mathematically connected keys, known
as a ‘public key’ and a ‘private key’, are used to encrypt or decrypt transactions.46 A transacting
party transferring bitcoins from the source address to the destination address, uses the public key
(available in public domain) to encode payments which can be decoded only by the recipient’s
private key.47 Such private key is also used by the payer to approve any transfers occurring
through his wallet. The transacting party can create as many pseudonymous bitcoin addresses as

37
Id.
38
Id.
39
Cocco L & Marchesi M, Modeling and Simulation of the Economics of Mining in the Bitcoin Market, 11 PLOS
ONE 10 (2016).
40
Id.
41
Jack Schofield, How Can I Invest in Bitcoin?, June 29, 2017, available at
https://www.theguardian.com/technology/askjack/2017/jun/29/how-can-i-invest-in-bitcoin (Last visited on
September 26, 2017).
42
BRIAN KELLY, THE BITCOIN BIG BANG — HOW ALTERNATIVE CURRENCIES ARE ABOUT TO CHANGE THE
WORLD 77 (2015).
43
Id., 5.
44
Nakamuto, supra note 6, ¶8.
45
Id., 173.
46
The Economist, Bits and Bob, June 13, 2011, available at
https://www.economist.com/blogs/babbage/2011/06/virtual-currency (Last visited on September 24, 2017).
47
Id.

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

necessary to use them in different bitcoin transactions. Though all such transactions are public,
nothing ties individuals/organisations to the bitcoin addresses used in doing such transactions,
ensuring the user’s anonymity.48 Though, this process ensures privacy and security, it does not
prevent the owner from ‘double spending’ (also referred as ‘counterfeiting’). This issue is
resolved by maintaining a non-modifiable public ledger for all transactions (by using the
timestamp server and the subsequent publication of the hash on the block chain).49 It is essential
to note that as opposed to the public blockchains as described above, private blockchains are also
in use, which give their owners control over who could verify, submit or read transactions
entered on such ledgers.50

Apart from these, other practical difficulties include scarcity of merchants and
vendors who transact in bitcoins, delays in verifying transactions, fluctuations in value, money
laundering, terrorist financing, etc.51 There have also been instances of security breaches in
bitcoin exchanges and hacking of wallet operators in the past.52 However, such instances have
been ineffective in limiting the growth of cryptocurrencies.
III. PRESENT REGULATORY MECHANISM IN INDIA
A. OVERVIEW

Currently, the regulatory mechanisms to govern bitcoins are almost non-existent

in India, and although bitcoins are not legal as yet, they have not been outrightly declared illegal
either.53 Having said that, bitcoins have not entirely failed to gather the interest of policymakers.
Recently, the Serious Fraud Investigations Office (‘SFIO’), the investigative arm of the Ministry
of Corporate Affairs, was instructed to gather data regarding the use of bitcoins by corporate
entities.54 Introduction of a regulatory regime has almost become essential, primarily because of
the rapid increase in market capitalisation of cryptocurrencies in the recent past.55 It has also
been suggested that such currency be traded on registered stock exchanges, similar to gold, in
order to establish a formal tax base, and the transactions be governed by the Securities and

48
This basic approach to ensure user anonymity is a good starting point, but availability of the details of all
transactions on public ledger (blockchain) along with non-anonymous internet infrastructure can present threats to
anonymity. See J. Herrera-Joancomartí & C. Pérez-Solà, Privacy in Bitcoin Transactions: New Challenges from
Blockchain Scalability Solutions in MODELING DECISIONS FOR ARTIFICIAL INTELLIGENCE (2016).
49
Nakamuto, supra note 6, ¶3.
50
See Praveen Jayachandran, The Difference Between Public And Private Blockchain, May 31, 2017, available at
https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-public-and-private-blockchain/ (Last
visited on September 26, 2017).
51
Apart from issues like money laundering and terrorist financing, most of the issues are self-correcting, since they
are assumed to be resolved with the increasing usage of cryptocurrencies.
52
Alex Hem, A History of Bitcoin Hacks, March 18, 2014, available at
https://www.theguardian.com/technology/2014/mar/18/history-of-bitcoin-hacks-alternative-currency (Last visited on
September 25, 2017).
53
Yuthika Bhargava, Bitcoin — To Ban Or Not To, July 13, 2017, available at http://www.thehindu.com/todays-
paper/tp-national/bitcoin-affords-anonymity-in-grey-area/article19267696.ece (Last visited on July 13, 2017).
54
The Economic Times, Government Steps Up Vigil On Bitcoin Transactions, May 30, 2017, available at
http://economictimes.indiatimes.com/news/economy/policy/government-steps-up-vigil-on-bitcoin-
transactions/articleshow/58911702.cms (Last visited on June 5, 2017).
55
The market capitalisation of cryptocurrencies increased by over 300 percent in the second quarter (April-June) of
2017. See Coinmarketcap, Cryptocurrency Market Capitalization, available at https://coinmarketcap.com/charts/
(Last visited on July 3, 2017).

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Exchange Board of India (‘SEBI’).56 This is a crucial development, since the jurisdiction of
SEBI in SEBI v. Pan Asia Advisors Ltd. (‘Pan Asia’) was held to extend to entities beyond India,
according to the territorial nexus doctrine. Further, it can help the regulators in enforcing the
SEBI Act and other disclosure requirements on entities operating in the bitcoin network, while
regulating cryptocurrencies in India (traded globally).57 Moreover, considering bitcoins as
security would mean that the sellers of bitcoins, exchanges where such currencies are traded and
SPVs formed to hold bitcoins would be subject to stringent regulatory requirements and arduous
penalties for non-compliance under the existing securities laws of India. Besides, an approach to
encompass bitcoin transactions within the ambit of SEBI is similar to that adopted by the US
Securities Exchange Commission (‘SEC’) a few years ago, where it brought an action against
virtual currency related investments, citing them as ‘securities’.58 However, no public stance has
yet been taken by the SEC on whether bitcoins are securities or not.59

Being a relatively unregulated form of currency, there is not much jurisprudence

available which discusses the ability of the citizens in India to transact through bitcoins.
However, the country’s central bank has occasionally issued warnings regarding the potential
financial, legal, and operational as well as security related risks on the use of virtual currencies.60
Despite these warnings, the RBI has also acknowledged the potential of blockchain in a white
paper issued by the Institute for Development and Research in Banking Technology
(‘IDRBT’).61 It stated:
“The ‘blockchain’ has a potential to fight counterfeiting and bring a huge
revolution in the functioning of financial markets, collateral identification as well
as payments system. The technology functions on the basis of a shared and
secured public ledger system and is not operated by any central user. Instead, it is
maintained by all the participants in the system on collective basis as per
generally agreed and applied rules.”62

56
Yuthika Bhargava, Bitcoin Trade May Come Under SEBI, July 12, 2017, available at
http://www.thehindu.com/business/Economy/bitcoin-affords-anonymity-in-grey-area/article19265595.ece (Last
visited on July 15, 2017).
57
SEBI v. Pan Asia Advisors Ltd., (2015) 14 SCC 71; See The Securities and Exchange Board of India Act, 1992,
§11C (It states that in case of reasonable grounds to believe that any person (within/beyond India) associated with
securities market has engaged in violation of any provision in the act, rules, regulations or directions issued, SEBI
can order for an investigation and take action).
58
SEC v. Shavers, No. 4:13-CV-416, 2013 WL 4028182; See Securities Exchange Act, 1934, §3(1)(10) (U.S.A.) (It
mentions ‘investment contracts’ under ‘security’. Scholars argue that if bitcoins are officially considered as
‘securities’ in US, they would come within the definition of investment contracts. In India, although ‘investment
contracts’ do not form a part of ‘securities’, an instrument or unit issued by a collective investment scheme to its
investors is a security); See also Tara Mandjee, Bitcoin, its Legal Classification and its Regulatory Framework, 15 J.
BUS. & SEC. L. 157 (2016).
59
See Jeffrey Alberts & Bertnand Fry, Is Bitcoin a Security?, 21 B.U. J. SCI. & TECH. L. 1 (2015) (For a detailed
analysis pertaining to the stance of the USA on this topic).
60
See Reserve Bank of India, Press Release, February 1, 2017,
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR205413F23C955D8C45C4A1F56349D1B8C457.PDF (Last
visited on May 3, 2017).
61
Institute for Development and Research in Banking Technology, White Paper on Applications of Blockchain
Technology to Banking, January, 2017, available at
http://www.idrbt.ac.in/assets/publications/Best%20Practices/BCT.pdf (Last visited on May 3, 2017).
62
Id.

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

However, a question can arise whether the Parliament under existing laws has the
ability to prohibit the use of cryptocurrencies between willing parties. While Article 246 read
with Article 248 of the Indian Constitution gives the power to the Parliament to frame laws
regarding currency, legal tender, coinage and other similar instruments, an overall lack of
regulatory understanding makes it imperative to demystify, albeit in brief, the prevailing
regulatory structure regarding the use of cryptocurrencies.
B. BITCOIN: WHAT IS IT?

The interesting aspect of bitcoins and other cryptocurrencies is that they are
highly versatile and have the ability to fit in more than one definition of law, creating a legal
conundrum. Arguably, cryptocurrencies can be classified as a computer program, currency,
good/commodity or derivative, depending upon their usage.

Due to its unique technical aspects, bitcoins, to a large extent, satisfy the modern
definition of money, as it is a medium of exchange, a unit of account and store of value – the
three prime essentials of money.63 In the case of United States v. Faiella64 and SEC v. Shavers,65
the US courts went as far as asserting that bitcoins classify as money because of their ability to
be easily purchased in exchange for legal tender.66 However, despite satisfying the criterion
listed above, certain shortcomings like high value volatility, low usage, etc. make it rather
‘unfeasible’ to utilise them in day to day transactions.

Presently, under the Foreign Exchange Management Act, 1999 (‘FEMA’),

currency is defined to include currency notes, postal notes, postal orders, money orders, cheques,
drafts, travellers cheques, letters of credit, acts of exchange and promissory notes, credit cards or
such other similar instruments, as may be notified by the RBI.67 Further, any currency which is
not Indian currency is termed as foreign currency.68 The RBI Act, also defines ‘foreign currency’
as having the same definition as given under the FEMA.69 Classification of bitcoins as currency
or not, assumes wide significance, because under the current regime, currencies are not subject to
tax.70 Bitcoins have as yet, not been notified by the RBI nor are they considered to be legal
tender and hence, they do not fall under the definition of Indian currency.

63
Canada Tax Foundation, Rebooting Money: The Canadian Tax Treatment of Bitcoin and Other Cryptocurrencies,
January 10, 2015, available at https://www.dwpv.com/assets/-
/media/F28E60C148DB463DB31E0CF66008FD2A.ashx (Last visited on June 14, 2017).
64
United States v. Faiella, 39 F. Supp. 3d 544, 545, (S.D.N.Y., 2014).
65
SEC v. Shavers No. 4: 13-CV 416, 2013 WL 4028182.
66
See United States v. Faiella, 39 F. Supp. 3d 544, 545, (S.D.N.Y., 2014) (The court said “Bitcoin clearly qualifies
as “money” or “funds” under these plain meaning definitions. Bitcoin can be easily purchased in exchange for
ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.”); See also SEC v.
Shavers, 4: 13-CV 416, 2013 WL 4028182, ¶2 (The court stated that “It is clear that Bitcoin can be used as money.
It can be used to purchase goods or services. [...] It can also be exchanged for conventional currencies [...]”).
67
The Foreign Exchange Management Act, 1999, §2(h).
68
Id., §2(m).
69
Id., §2(bix).
70
The Central Goods and Services Tax Act, 2017, §2(52) (It defines ‘goods’ as every kind of movable property
other than money and securities but includes actionable claim, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before supply or under a contract of supply).

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Since the definition of ‘foreign currency’ under §2(m) of the FEMA specifies
foreign currency as being any currency other than legal tender of India, much ambiguity arises
due to the definition’s wide import, and some discussion on its possible implications is warranted
for the sake of understanding. Does it include ‘private money’ having formal recognition in other
countries, for instance, Germany recognises bitcoins as private money,71 or does it include
currency which though not legally recognised, is widely used in another country? Can it be
treated in a manner similar to Euro or United States Dollar?
The term ‘currency’ generally means the recognised tender of a particular
country. Thus, ‘foreign currency’ refers to a currency accepted legally as a unit of account of
some other country. Consequently, if cryptocurrencies are legally recognised as currency by
another country, it would fall within the domain of this definition. Indeed, the inclusion of
bitcoin within the ambit of the FEMA widely depends on the nature of bitcoins, its usage as well
as the purpose for which it is used.
Further, it is also essential to note that as cryptocurrencies like bitcoins are
nothing but a set of instructions expressed in codes, they also fall under the definition of
‘computer programme’ under Indian Copyright Act, 1957.72 In the landmark case of Tata
Consultancy Services v. State of Andhra Pradesh,73 the Hon’ble Supreme Court held that
computer software/programs can be included within the definition of ‘goods’ for tax purposes if
they have utility, are capable of being bought and sold and transmitted, transferred, delivered,
stored or processed.74 The Court cited that a software or program consists of various commands
enabling the computer to perform a particular task and though the copyright remains with the
originator, the moment the copies are made and marketed, they become goods which are
susceptible to sales tax.75
C. BITCOINS AS SECURITIES, DERIVATIVES

There is little doubt that the perceived value of bitcoins is subject to enormous
volatility as compared to traditional currency. Such price volatility may, prima facie, give an
illusion that it should be governed in the same manner as securities or derivatives.

The word ‘securities’ has been defined in §2(h) of the Securities Contracts
(Regulation) Act, 1955 (‘SCRA’), to include, inter alia, shares, bonds, debentures, derivatives,
government securities, and such other instruments as may be specified by the Central
Government.76 One of the essential feature of securities is that they must be issued by an ‘issuer’
(such as a public or private company), whereas cryptocurrencies are decentralised – meaning that
they are not issued by any authority. Thus, they could, at the very best, be covered within the
scope of definition only if they are specified by the Central Government as such. Furthermore, a
‘derivative’ under the SCRA means either of the two things – (i) security derived from debt

71
Emilie Spaven, Germany Officially Recognises Bitcoin As "Private Money", August 19, 2013, available at
https://www.coindesk.com/germany-official-recognises-bitcoin-as-private-money/ (Last visited on September 26,
2017).
72
The Indian Copyright Act, 1957, §2(ffc).
73
Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308.
74
Id.
75
Id., ¶17.
76
The Securities Contracts (Regulation) Act, 1955, §2(h).

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instrument, share, loan, risk instrument, contract for differences or any other form of security; or
(ii) a contract which derives its value from the prices of underlying securities.77 Derivatives are
basically securities meant to aid and assist temporary hedging of risk in the price of either
inventory holding or a financial commercial transaction.78 There are two essential features of
derivatives – (i) they do not hold any independent value i.e. the value is derived from an
underlying asset and (ii) a derivative is a contract to hedge risk.79 Apart from this, in practice,
almost all derivatives have a fixed expiry date, as the value of the contract is dependent on this
expiry period. It is difficult to see these features in cryptocurrencies since (i) cryptocurrencies
have independent value and (ii) it is not a contract per se. Moreover, it does not fit within the
definition prescribed under the SCRA.80
IV. TAXATION OF CRYPTOCURRENCIES
The power to levy taxes is prescribed under Article 246 which grants power to the
Parliament as well as state legislatures to impose taxes.81 Article 265 provides that no tax can be
imposed or collected without the authority of law.82 By virtue of Constitution (One Hundred and
First Amendment) Act, 2016, the Parliament made several amendments with respect to the
imposition of Goods and Services Tax (‘GST’) including Article 246A, wherein exclusive power
was given to the Parliament to make laws with regard to interstate trade and commerce.83
Furthermore, Schedule VII lists the subject matters where Parliament and state legislatures can
impose taxes.84

Broadly speaking, any transaction involving bitcoins could be analysed from two
viewpoints – income and expenditure. Depending upon the nature and parties to the transaction,
it may be taxable under the Income Tax Act, 1961 ('ITA') (in case of income), or Central Goods
and Services Tax Act, 2017 ('Act') and other laws (in case of expenditure). Since the regulatory
framework regarding cryptocurrencies is uncertain, this paper tries to analyse the taxation (or
non-taxation) by considering them as both goods and currency, two major approaches currently
prevalent across the world.85
A. TREATMENT UNDER INDIRECT TAX

77
Id., §2(ac).
78
Siladitya Chatterjee, Derivatives - A Conceptual Analysis, (2007) 73 SCL 50 (MAG.).
79
Id.
80
See The Reserve Bank of India Act, 1934, §17(6A) (The term ‘derivative’ is defined to mean an instrument
settled at a future date whose value is derived from the change in one or a combination of variables prescribed under
the section, namely interest rate, price of securities (CG or SG or foreign securities), foreign exchange rates, index
of rates, credit ratings, prices of gold or silver or bullion, or any other similar variable. However, since the value of
cryptocurrencies is independent of these factors, it cannot be called as ‘derivative’ under the RBI Act).
81
The Constitution of India, 1950, Art. 245(1).
82
Id., Art. 265.
83
Id., Art. 264A(2).
84
See id., Schedule VII, List I, Union List, Items 82-92B; See also id., Schedule VII, List II, State List, Items 46-62.
85
For instance, in Germany, Japan and United Kingdom, bitcoins are considered as private money whereas in
countries like Australia and USA, it is considered as goods/property, See Part V of the paper (Evolving International
Practices).

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Nearly sixteen years since its proposal, GST was implemented with effect from
July 1, 2017, across India. GST subsumes most of the indirect taxes, barring few. 86 Remarkably,
the implications of GST on cryptocurrencies propel a fascinating discussion, since its
technicalities render the indirect tax treatment of cryptocurrencies very complicated.

There are primarily two methods through which it is possible to attain bitcoins –
through mining or by purchasing through bitcoin exchange.87 Getting bitcoins through these
methods warrant different tax implications under taxation laws of India, but first, it is essential to
classify them as goods/property or money, as discussed earlier. If bitcoins were to be considered
as money, they would be exempted from tax (discussed below). Hence, I will analyse the indirect
tax structure considering bitcoins as goods or property.
Interestingly, treatment of bitcoins as goods/property would mean that supply of
bitcoins is a ‘taxable supply’ and hence subject to GST. However, a supply of bitcoins as goods
or property in exchange of other virtual/real goods should technically fall within the ambit of
‘barter transaction’ since bartering is simply an exchange of one good for other good/s. In its
most ingenuous form, any barter transaction involves two essentials – (i) direct exchange of
goods or services for other goods/services and (ii) no use of money.88 Previously, under the
various state VAT laws, the incidence of tax arose when there was sale of goods in exchange of
cash, deferred payment, or any other valuable consideration.89 The expression ‘any other
valuable consideration’ provided a wide scope of ambiguity, since the term should typically
derive reference, ejusdem generis, from its preceding terms (i.e. cash and deferred payment),90
and therefore, must not include an exchange of goods for other goods. This view was accepted in
the case of Sales Tax Commissioner v. Ram Kumar Agarwal,91 where a transaction of gold
bullions in exchange for ornaments was excluded from the definition of sale under §2(h) of the
Sale of Goods Act, 1930. However, the position is uncertain, as when a transaction is used as a
device to conceal monetary consideration, courts may unravel the device to include it within the
ambit of sale.92

86
Taxes such as basic custom duty (‘BCD’), stamp duties, road taxes and duties of excise on petroleum crude, high
speed diesel, motor spirit (petrol), aviation turbine fuel and tobacco/tobacco products are excluded from the purview
of GST. See Sharad Raghavan, All you need to know about GST, November 29, 2015, available at
http://www.thehindu.com/business/Industry/all-you-need-to-know-about-goods-and-services-tax/article7929788.ece
(Last visited on March 23, 2017).
87
Anthony Volastro, CNBC Explains: How to Mine Bitcoins on your Own, January 23, 2014, available at
http://www.cnbc.com/2014/01/23/cnbc-explains-how-to-mine-bitcoins-on-your-own.html (Last visited on June 13,
2017).
88
George Dalton, Barter, 16 JOURNAL OF ECONOMIC ISSUES (2016) (discussing the essentials and intricacies of
barter transactions).
89
Pawan K. Aggarwal, Incidence of Major Indirect Taxes in India, 14–16, 1995, available at
http://www.nipfp.org.in/media/medialibrary/2014/10/INCIDENCE_OF_MAJOR_INDIRECT_TAXES_IN_INDIA.
pdf (Last visited on April 14, 2017).
90
Devi Dass Gopal Krishnan v. State of Punjab, (1967) 20 STC 430.
91
Sales Tax Commissioner v. Ram Kumar Agarwal, (1967) 19 STC 400 All; See also M Jaihind v. State of Kerala,
(1998) 111 STC 374; CTO v. Kansari Udyog Sahakari Samiti, (1979) 43 STC 176.
92
See C Mohammedali v. State of Kerala, (2010) 31 VST 427; Dhampur Sugar Mills v. CTO, (2006) 147 STC 57;
State of Tamil Nadu v. TMT Drill (P.) Ltd., (1991) 82 STC 59.

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This set of issues does not invite much consideration after the implementation of
GST, as tax under the Act is levied on supply of goods or services or both,93 and ‘supply’
includes barter made or agreed to be made for a consideration in the course or furtherance of
business.94 Hence, there is no ambiguity that barter transactions will not be tax-free under GST.
Three conditions may arise in such a scenario –
a. Transactions involving exchange of cryptocurrencies,
b. Transactions involving exchange of cryptocurrencies for goods and services, and
c. Transactions involving exchange of cryptocurrencies for goods and services through
intermediary.95

Assuming that the parties to the transaction are registered and situated within
India and supplies are subject to tax, any transaction involving exchange of cryptocurrencies for
money or vice versa (scenario ‘a’) for which separate commission is charged as consideration,
would invoke GST on the value of cryptocurrencies as well as on the commission charged. This
is because an exchange of cryptocurrency would be included within the ambit of supply of goods
for consideration96 (first event of taxation) and commission would be the consideration for the
provision of service97 (second event of taxation).
In case of exchange of cryptocurrencies for goods and services (scenario ‘b’),
GST would be chargeable on the transaction value. Hence, if ‘B’ purchases commodity ‘X’ in
exchange for ten bitcoins from supplier ‘A’, the entire value of ten bitcoins would be subject to
GST, value being determined as per the provisions of valuation under the Act (discussed later).
Furthermore, in scenario ‘c’ where the intermediary acts as an agent to procure bitcoins from
consumer ‘B’ in exchange for goods/services on behalf of ‘A’, two separate transactions occur
providing normal currency to ‘A’ in lieu of those bitcoins. The first occurs between the receiver
and the supplier and the second between the intermediary and the supplier, both separately
chargeable under GST. In all these scenarios, if the supplier is not registered, tax would be
payable on reverse charge basis by the recipient instead of the supplier, collecting the same on
his behalf.98
However, the procedure of taxation described above has some loopholes. An
approach where cryptocurrencies are considered as goods means that certain transactions would
be taxable twice – firstly on supply (otherwise exempted for a transaction in money) and
secondly on consideration, unnecessarily leading to higher tax. This higher incidence of taxation
puts the businesses operating in cryptocurrencies at a huge disadvantage while also diminishing
their purchasing capacity. The issue gets further complicated if the supplier or the receiver
resides outside the territorial limits of India, i.e., in international transactions.

93
The Central Goods and Services Tax Act, 2017, §9(1).
94
Id., §7(1)(a).
95
The Australian Taxation Office provides three possible instances where a transfer of bitcoins is a supply for GST
purposes. See Australian Taxation Office, Goods and services tax: the GST Implications of Transactions Involving
Bitcoin, August 20, 2014, available at
http://law.ato.gov.au/atolaw/view.htm?locid=%27DGS/GSTR2014D3/NAT/ATO/fp15%27&PiT=99991231235958
#fp15 (Last visited on June 19, 2017).
96
The Central Goods and Services Tax Act, 2017, §§7(1)(a), 2(52), 2(31).
97
Id., §2(61).
98
Id., § 9(4).

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Another important question may arise regarding the valuation of cryptocurrencies.

Usually, the worth of a digital currency could be determined by translating the value at a point of
time into the relevant unit of account of the country. However, since bitcoin hardly fulfils a
reliable ‘store of value’ function,99 the market value may not be a true representation of
assessable value. For instance, there may be a mismatch between the value of good(s) and the
value of cryptocurrencies, or when the cost to one party does not necessarily reflect the value
that the other party receives.
Under normal circumstances, §15 of the Act is attracted in cases where the price
is actually paid or payable for the said supply and the parties to the transaction are not related.100
However, in cases where the price is not the sole consideration for supply or supply is done for a
consideration not entirely consisting of money, the Goods and Services Tax (Determination of
Value of Supply) Rules, 2017, would apply. For a supply of goods and services done for a
consideration not wholly in money, the value of such supply shall be its open market value.101
Accordingly, that value would be the transaction value which is listed on bitcoin price index at
the date of issuance of invoice or the date of payment, whichever is earlier.102 Hence, if ‘X’
purchases bitcoins from ‘Y’ after issuance of invoice at a rate of 2000 BTC/USD on January 1,
2017, and makes payment for the same on July 10, 2017 (2600 BTC/USD), the transaction value
would be determined on the basis of the rate prevailing at the time of issuance of invoice (which
is earlier). Since cryptocurrencies are volatile in nature, a purchaser may affect invoice or make
payment when the value is lower, thus leading to low collection of taxes. Furthermore, since it is
a digital currency without any specific jurisdiction, issues regarding point of taxation, place of
supply, etc. could arise. Needless to say, the Input Tax Credit (‘ITC’) may be available to the
supplier as per the provisions of Chapter V of the Act.103
Thus, analysis of the above provisions indicates that in dealing with the indirect
tax structure concerning cryptocurrencies, major issues could arise, especially in respect of
valuation of bitcoins for the purpose of GST, double taxation, etc. Factoring in technical aspects
of cryptocurrencies like its value volatility, as discussed above, could therefore lead to serious
issues without a consistent framework for its tax treatment. A conscious effort by the
government to develop regulations specifically dealing with tax treatment of bitcoins is therefore
vital and important in regulating this complex currency.
An alternative view considering cryptocurrencies as ‘currency’ and its treatment
under GST may also be solicited, since bitcoin appears to fulfil the rudimentary requirements of
‘currency’,104 and although not generally accepted at present, it may become the central medium

99
In determining the ‘store of value’ function in bitcoins, it is essential to consider the volatility of such currency,
since without predicting the future value, a user cannot store money for future purchases. See Max Kubát, Virtual
Currency Bitcoin in the Scope of Money Definition and Store of Value, 30 PROCEDIA ECONOMICS AND FINANCE 409,
416 (2015).
100
The Central Goods and Services Tax Act, 2017, §15(1).
101
The Goods and Services Tax (Determination of Value of Supply) Rules, 2017, Rule 1(a).
102
The Central Goods and Services Tax Act, 2017, §12(2).
103
Id., §§16-21 (ITC is available in all circumstances involving legal transactions. It is calculated by determining tax
paid on purchases of inputs used for the purpose of output generated).
104
Canada Tax Foundation, supra note 63, 12.

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of exchange with the advancement of digital age in coming years.105 Under the GST regime, a
pure transaction in money does not attract GST since money (which includes foreign currency) is
exempted from the definition of ‘goods’ under §2(52) of the Act as well as from the definition of
‘service’ under §2(102) of the Act. Furthermore, a supply of cryptocurrencies would also be
included in the 'Negative List'106 as inter se sale or purchase of foreign currency among banks,
among authorised dealers of foreign exchange, or among banks and such dealers is exempt from
taxation.107
It is to be noted that under GST, any supply of service by an unregistered person
outside India to a registered person, would be taxable under the reverse charging mechanism
(‘RCM’), specifically when service recipient is located in India.108 Thus, supply of taxable
bitcoin related services by foreign unregistered entities would attract RCM, meaning the
recipient would be required to pay taxes. RCM requires the service recipient to pay taxes on the
supply of goods/services to him instead of service provider, for which he is also required to get
compulsorily registered.109 Determining place of supply, in case of transactions carried virtually,
has always been a major area of concern, since such transactions are equipped with high
anonymity, particularly in case of cryptocurrencies,110 as the recipient is only required to disclose
his bitcoin address while dealing with the service provider. Thus, unless voluntarily disclosed,
compliance under the RCM by the recipient seems highly unlikely.
1. Mining of bitcoins: Service?

The previous discussion considers the tax treatment of bitcoins arising at the time
of transfer. The next question which arises is that how is mining as an activity taxed under
indirect taxes, or more importantly, whether it should be taxed at all. While considering this
aspect, several issues arise relating to (i) parties to the transaction (ii) place of supply of the
service (iii) consideration (iv) point of levy of tax, etc. It is necessary to deal with these issues.

Under the erstwhile service tax laws, ‘service’ meant any activity carried out by a
person for someone else for consideration,111 whereas a ‘person’ included, inter alia, individuals,
HUFs, companies, firms, limited liability partnerships, body corporates, co-operative societies,
local authorities and every artificial juridical person not covered within the scope of the
definition.112 These definitions have found recognition in GST too.113 The essential elements for
taxing a service therefore includes (i) supply of taxable services, (ii) in furtherance of a business
(iii) for a consideration and (iv) a benefit of service to be provided by a party (service provider)

105
See Dominic Frisby, Don’t Let The Bankers Fool You: Bitcoin Is Here To Stay, September 15, 2017, available at
https://www.theguardian.com/commentisfree/2017/sep/15/jp-morgan-ceo-wrong-bitcoin-jamie-dimon (Last visited
on September 26, 2017).
106
See The Central Goods and Services Tax Act, 2017, Schedule III (Activities or transactions which shall be treated
neither as supply of goods nor a supply of services).
107
Previously excluded under The Finance Act, 1994, §66D(n).
108
The Central Goods and Services Tax Act, 2017, §9(4).
109
See id., §2(98) (Definition of ‘reverse charge’); See also id., §24 (Compulsory registration).
110
See Part II of the Paper for more details on anonymity of cryptocurrencies.
111
The Finance Act, 1994, §65B(44).
112
Id., §65B(37).
113
See The Central Goods and Services Tax Act, 2017, §2(84) (‘person’); See also The Central Goods and Services
Tax Act, 2017, §2(102) (‘service’).

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in favour of another party (service receiver),114 unless any of these are specifically exempt under
the Act. There must also be a direct link between the consideration and the service provided,
based on a contractual relationship.
Assuming the mining activity is done in furtherance of business, any transaction
of mining, prima facie appears to be a ‘service’ within the ambit of the Act, since it is a supply of
computing power (service), by the bitcoin miner (service provider) to the users of bitcoin system
(service recipient) in exchange for bitcoins.115 Here, though the recipient is not identifiable, it
may be included within the ambit of the ‘body of individuals’ under §2(84) of the Act (definition
of person) and accordingly, the value generated would be considered to be inclusive of GST. It is
also essential to note that any activity performed without consideration is outside the ambit of
‘supply’ under GST. In cases of bitcoin mining, not every miner is rewarded with bitcoins for
solving cryptographic algorithms, as mining is a competitive process whereby only successful
miners are rewarded with new bitcoins. Thus, an unsuccessful supply of computing power would
not be taxable under GST.

B. TREATMENT UNDER DIRECT TAX

The treatment of cryptocurrencies under direct tax regime is mainly governed by

the ITA in India. Till date, the Income Tax Department (‘ITD’) has neither issued any guidance
regarding taxation of digital currencies nor do any disclosure requirements exist in relation to
such income earned. If bitcoins are considered as ‘currency’, they would not be susceptible to tax
under ITA. This is because firstly, under the ITA, the definition of ‘income’ being an inclusive
one, comprises of not only the ‘natural’ meaning but also the items mentioned under §2(24) of
the ITA.116. But neither the natural meaning nor §2(24) of the ITA includes ‘money’ or
‘currency’ as income, although it includes ‘monetary payment’. Secondly, being a mode of
consideration, the tax incidence would be on the transaction and not on the currency.

On the other hand, if bitcoins are considered as goods/property, then clearly they
would be either covered within the charging provision of 'Profit and Gains from Business and
Profession'117 (in case of goods) or 'Income from Capital Gains'118 (property), depending upon
whether it has been used for the purpose of business/profession or not. It must be noted that the
ambit of the word ‘income’ is not restricted to the words 'profits' and 'gains' and anything which
can appropriately be designated as 'income' is liable to be taxed under the ITA, unless expressly
exempted. 119

1. Treatment under the head ‘Capital Gains’

114
Id., §7(1)(a).
115
Canada Tax Foundation, supra note 63, 21.
116
CIT/CWT v. P.R.S. Oberoi, (1990) 183 ITR 103 (Cal.) (“The word 'includes' is often used in interpretation
clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute.”); See also
Dooars Tea Co. Ltd. v. CAIT, (1962) 44 ITR 6 (SC) (The word ‘income’ is formidably wide and vague and its
extent and sweep are not controlled or limited by the use of the words 'profits and gains').
117
The Income Tax Act, 1961, §28.
118
Id., §45(1).
119
Maharajkumar Gopal Saran Narain Singh v. CIT, (1935) 3 ITR 237 (Bom.).

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§2(14) of the ITA defines capital asset as “property of any kind held by the
assessee whether or not connected with his business or profession”.120 It excludes personal
effects of the assessee i.e. movable property of any kind which pertains to the assessee’s person,
where an intimate connection between the effects and the person of the assessee exists.121 This
definition of ‘capital asset’ is of the widest amplitude and covers all kinds of property except
those expressly excluded under the Act.122 Hence, any gains arising from the transfer of bitcoins
must be considered as capital gains, if they have been held for the purpose of investment.
Accordingly, while transferring cryptocurrencies, if the period of holding is more than thirty-six
months, it would be long term capital asset taxable at such rates as prescribed under the ITA on
such long-term capital gains ('LTCGs').123 In all other cases, tax would be determined as per the
provisions relating to short term capital gains (‘STCGs').124 In such a case, the cost of acquisition
would be the market value prevailing at the time of creation/purchase of bitcoins and the surplus
arising out of sale consideration over and above the cost of acquisition would be subjected to tax
under §45 of the ITA.

Interestingly, in treating bitcoins as capital assets, a difficulty arises in

determining the ‘cost of acquisition’ at the time of mining.125 Since bitcoin is a ‘self-generated
asset’ generated by the system as a reward for verifying the transactions, the cost of acquisition
(‘COA’) is technically unascertainable as the only input the miner employs is the computer
capacity under the system. In the case of Commissioner of Income-tax v. B.C. Srinivasa Shetty
('B.C. Srinivasa Shetty'),126 the Supreme Court held that where the COA is ‘indeterminable’, no
capital gains would be chargeable on such costs. Under such a circumstance, there may be a
possibility that the gain from sale of such bitcoins is exempt from tax. The ratio of that case was
as follows –

“The mode of computation and deductions set forth in section 48 provide

the principal basis for quantifying the income chargeable under the head "Capital
gains". What is contemplated under section 48 is an asset in the acquisition of
which it is possible to envisage a cost. […] None of the provisions pertaining to
the head "Capital gains" suggests that they include an asset in the acquisition of
which no cost at all can be conceived. Yet there are assets which are acquired by
way of production in which no cost element can be identified or envisaged. […] A
transaction to which those provisions cannot be applied must be regarded as never
intended by section 45 to be the subject of the charge.”127

120
The Income Tax Act, 1961, §2(14).
121
Assistant Commissioner of Income-tax v. Faiz Murtaza Ali, (2012) 6 TMI 41; See also H.H. Maharaja Rana
Hemant Singhji v. CIT, (1970) 77 ITR 1007 (Raj).
122
Commissioner of Income Tax v. B.C. Srinivasa Shetty, (1981) 2 SCC 460.
123
See The Income Tax Act, 1961, §112 (The rate of tax for Long Term Capital Gains is twenty percent).
124
In case of non-equity capital assets held for short term, Short Term Capital Gains on such funds are taxed as per
the slab rates of individual investor.
125
For computation of capital gains under the Income Tax Act, 1961, §§48-49, cost of acquisition shall be as
determined under the Income Tax Act, 1961, §55.
126
Commissioner of Income-tax v. B.C. Srinivasa Shetty, (1981) 2 SCC 460; See also R. Dalmia v. CIT, (1982) 133
ITR 169 (Delhi) (The High Court observed that, “Capital gains have to be included only at the time they are
ascertained. If there are gains, they should be known”).
127
Id.

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In the case of Evans Fraser & Co. Ltd. v. CIT,128 the Bombay High Court
followed the principle laid down in B.C. Srinivasa Shetty and held that:

“since income chargeable to capital gains tax is to be computed by deducting

from the full value of the consideration, the cost of acquisition of the capital asset
and the cost of any improvement thereto, any gain arising out of the sale of
goodwill would not be liable to the capital gains tax since the cost of
improvement of any such goodwill cannot be ascertained.”129

This view was also approved in Bawa Shiv Charan Singh v. CIT.130 Although the
above views appear to direct us to conclude that intangible capital assets whose value is not
determinable, are outside the purview of the ITA, given the substantial gains arising at the time
of mining, it is difficult to say that such gains would be exempt from tax for long. Indeed, a
reference may be made to valuation officer under §55A of the Act to ascertain the fair market
value at the time of creation of cryptocurrencies and that would constitute the COA of the capital
asset.131

2. Taxability under 'Profit and Gains from Business and Profession’

The tax treatment of cryptocurrencies when held as ‘stock in trade’ is not subject
to major difficulties, as the issues arising while treating it as capital gains do not arise when such
cryptocurrencies are held in furtherance of business activity. Under §2(13) of the ITA, the
definition of ‘business’ is inclusive in nature, and comprises of “trade, commerce or manufacture
or any adventure or concern of such nature.”132 Undoubtedly, any continuous activity in nature of
trade in cryptocurrencies is included within this definition, and profits realised are taxable
thereunder, chargeable to tax as per §28 of the ITA.133 Even though profits may not be realised in
money, they are taxable even if they are ‘in kind’. Also, any expenditure incurred for this
purpose, such as purchase of computing power as capital asset, should be allowable as deduction
in accordance with the provisions specified in §30 to §43D of the ITA.134

Ordinarily, mining of bitcoins per se could be considered to be a taxable event

under income tax laws and fair market value of bitcoins could be considered as taxable income.
However, there exists some ambiguity regarding valuation of income at the time of mining and

128
Evans Fraser & Co. Ltd. v. CIT, (1982) 137 ITR 493 (Bom.).
129
Id.
130
Bawa Shiv Charan Singh v. CIT, (1984) 149 ITR 29 (Delhi) (The Court while deciding in favour of the assessee
observed that where the valuation of tenancy rights was under consideration, since the value depended upon a
variety of facts such as locality, the success of the business, the trend of the customers, the likelihood of competition
and so on and so forth and where it was not possible to predicate the exact rate or period of growth or the time of
birth of such right, the cost of acquisition was not possible to be ascertained).
131
The Income Tax Act, 1961, §55A (With a view to ascertain Fair Market Value of capital asset, the Assessing
Officer may refer the valuation of capital asset to Valuation Officer).
132
Id., §2(13).
133
Id., §28 (Charging Provision provides a list of incomes that are chargeable to tax under the head ‘Profits and
Gains from Business and Profession’).
134
These provisions deal with expenditure allowed as deduction under §§30-37(1) as well as specific allowances and
disallowances under the Income Tax Act, 1961.

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

as dealt in the later part of this paper, compliance with disclosure requirements is also a major
problem.

As mentioned earlier, there is no ruling by the government on whether bitcoins

are legal in India.135 However, the illegality of bitcoins does not have any bearing on its
taxability.136 Indeed, income tax makes no distinction between illegal and legal income. Thus,
even if cryptocurrencies are declared illegal, they would still be subject to tax under the ITA,
despite the prosecution under the relevant law for illegal activities.

C. TAX EVASION AND ILLICIT ACTIVITIES

There are currently 810 currencies operating on at least 4,463 markets with the
total market cap of around USD 390 billion.137 This huge potential of currencies like bitcoin
makes it a preferred destination for money laundering and terrorist financing, since its virtual
nature makes it very difficult to trace the transactions to the source.138 A recent example of this is
the May 2017 worldwide cyberattack by a ransom cryptoworm called ‘WannaCry’, which locked
up data in around 230,000 infected computers and demanded a ransom in bitcoins.139 Instances
like these are not uncommon among criminals and terrorists.140 Thus, unless income is disclosed
voluntarily or disclosure requirements are strictly enforced, it is hard to know if any income is
being generated. Secondly, transactions take place across multiple jurisdictions, posing myriad
difficulties in enforcement of the rules and regulations.

It has been pointed out by scholars that cryptocurrencies possess the traditional
characteristics of ‘tax havens’, particularly because there is no specific jurisdiction in which they
operate and are not subject to taxation at source.141 Furthermore, their operation is not dependent
on the existence of financial intermediaries such as banks.142 As a result, traditional methods of
curbing evasionary practices such as imposing regulations on financial intermediaries, due
diligence, monitoring and reporting norms, etc. may be totally ineffective. Transactions
involving third party services located outside the jurisdiction (viz. bitcoin exchange services)
may even escape the scrutiny of government entirely, encouraging money laundering and other
malicious activities.143 Such evasion is not unexpected, as the freedom to transact in bitcoins is
latched with a major weakness – weak enforcement of law.

135
Bhargava, supra note 53.
136
CIT v. K. Thangamani, (2008) 309 ITR 15 (Madras), ¶22.
137
See supra note 5.
138
KUO CHUEN, supra note 35, 326.
139
Samuel Gibbs, WannaCry: Hackers Withdraw £108,000 Of Bitcoin Ransom, August 3, 2017, available at
https://www.theguardian.com/technology/2017/aug/03/wannacry-hackers-withdraw-108000-pounds-bitcoin-ransom
(Last visited on September 30, 2017).
140
David Carlisle, Cryptocurrencies and Terrorist Financing: A Risk, But Hold the Panic, March 2, 2017, available
at https://rusi.org/commentary/cryptocurrencies-and-terrorist-financing-risk-hold-panic (Last visited on September
28, 2017).
141
O. Marian, Are Cryptocurrencies Super Tax Havens?, 112(19) MICH. LAW REV. 38–48 (2013).
142
Id., 42.
143
See Federal Bureau of Investigation, Directorate of Intelligence, Bitcoin Virtual Currency: Intelligence Unique
Features Present Distinct Challenges for Deterring Illicit Activity, April 24, 2012, available at
https://www.wired.com/images_blogs/threatlevel/2012/05/Bitcoin-FBI.pdf (Last visited on July 9, 2017).

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Notably, the federal laws of USA have taken a bifurcated approach to money
laundering144 and terrorist financing145 activities carried by means of virtual currencies, by
introducing both regulatory measures and statutory penalties. The amended Bank Secrecy Act of
1970 (‘BSA’) in the USA, makes it compulsory for unregulated financial institutions to register
themselves with the State.146 Companies are required to file Current Transaction Reports
(‘CTR’) and Suspicious Activity Reports (‘SAR’) in case of any possible violations.147 Statutory
penalties have also been imposed on money laundering, it being criminalised under the Money
Laundering Control Act, 1986. In India, the prevalence of cryptocurrencies like bitcoin is gaining
traction, albeit slowly.148 Given the potential for tax evasion and the lack of proper regulatory
oversight,149 eliminating the risk of evasionary practices and keeping a tab on where funds of
taxpayers are, would indeed be a challenge for the Indian government.

As stated earlier, compared to conventional cases of fraud and money laundering,

evasion of taxes through cryptocurrencies is effortless for evaders due to its unique
characteristics.150 In that background, bitcoins are really just ‘cold, hard cash’151 floating across
the internet and a true feast for criminals to thrive upon. Conventional taxation norms are
impractical in dealing with these next-generation financial assets, leading to utter failure in
identifying users, detecting suspicious activities, or obtaining transaction records.152 Since the
scheme of cryptocurrencies stems from its self-regulatory properties, making and enforcing laws
aimed at self-disclosures seems to be our best bet at the moment. The European Union in its draft
legislation has already established a precedent in this direction by calling for virtual currencies to
‘not be anonymous’ and obligating providers of exchange platforms and custodian wallet
operators to monitor and identify suspicious activities.153

144
Money laundering is a process whereby funds obtained illegally are rendered clean so that they may be used for
legal activities. Contrarily, terrorist financing is a similar process, the sole difference being that legal money is used
for illegal activities. However, both are considered under the ambit of ‘money laundering’ under Prevention of
Money Laundering Act, 2002, in India.
145
See id.
146
31 U.S. Code §5330(a)(1) states ‘money service business’ (‘MSB’) be registered with Financial Crimes
Enforcement Network (FinCEN). MSBs are persons doing business in the capacity of dealers in foreign exchange,
check casher, issuer of traveller checks and money orders, money transmitters, US Postal Services and selling of
prepaid access. See 31 C.F.R. §1010.100(ff) (U.S.A.).
147
Kelsey L. Penrose, Banking on Bitcoin: Applying Anti-Money Laundering and Money Transmitter Laws, 18 N.C.
BANKING INST. 529 (2013).
148
As of last quarter of 2016, the number of bitcoin users were approximately 30,000. See J. P. Buntinx, Over
30,000 People In India Use Bitcoin For Transactions, August 19, 2016, available at
http://www.newsbtc.com/2016/08/19/30000-people-india-use-bitcoin-transactions/ (Last visited on July 13, 2017).
149
The Hindu, Plea in SC Seeks Curb On Cryptocurrencies, July 16, 2017, available at
http://www.thehindu.com/news/national/plea-in-sc-seeks-curbs-on-cryptocurrencies/article19290260.ece (Last
visited on September 25, 2017).
150
See Part II of this paper (Mechanics of Bitcoin) for more details).
151
Rosemary Westwood, Why Bitcoin Is the Banking Industry's Newest, Biggest Threat, January 2, 2013, available
at http://www.macleans.ca/economy/business/why-bitcoin-is-the-banking-industrys-newest-biggest-threat (Last
visited on September 28, 2017).
152
Thomas Slattery, Taking a Bit out of Crime: Bitcoin and Cross-Border Tax Evasion, 39 BROOK. J. INT'L L. 829,
874 (2014).
153
KRIŠJĀNIS KARIŅŠ & JUDITH SARGENTINI, COMMITTEE ON ECONOMIC AND MONETARY AFFAIRS & COMMITTEE
ON CIVIL LIBERTIES, JUSTICE AND HOME AFFAIRS, Report on the proposal for a directive of the European
Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

Though there is no doubt that cryptocurrencies are superior alternatives to cash

transactions, it is also to be noted that the practical issues relating to evasionary practices arising
from their use are not significantly different from those arising through cash transactions. In
India, statutory penalties for such activities are already specified in the Prevention of Money
Laundering Act, 2002 ('PMLA'), which prohibits direct or indirect attempts at laundering
money154 and specifies a punishment of a maximum of ten years of imprisonment.155
Furthermore, India is an active member of the Financial Action Task Force (‘FATF’)156 on
money laundering and a signatory to the Convention of Mutual Administrative Assistance in Tax
Matters as well as a range of other UN Conventions157.

Nevertheless, the effective application of the PMLA to illegal transactions in

cryptocurrencies is a grey area since it is unclear whether the reporting obligations prescribed
under Chapter IV (Obligations of Banking Companies, Financial Institutions and Intermediaries)
of the PMLA would extend to wallet operators or bitcoin exchanges or any third party bitcoin
services.158 If such obligations do not extend to these entities, the Directorate of Enforcement
(investigative arm in such cases) would be unable to legally access, survey, search or seize
information, an essential aspect to enforce the PMLA and impose penalties. India is also a
signatory to the Foreign Account Tax Compliant Act (‘FATCA’) and Common Reporting
Standards (‘CRS’),159 norms which obligate reporting financial institutions (‘RFI’)160 to maintain
and report information in respect of reportable accounts to combat offshore tax evasion.
However, even here, a third-party bitcoin service or an exchange/wallet operator may not come
within the purview of a RFI, which only includes custodial institutions (viz. CDSL or NSDL),
depository institutions (banks, credit unions, etc.), investment entities (such as NBFCs) or
specified insurance companies.161

system for the purposes of money laundering or terrorist financing and amending, Directive 2009/101/EC (COM
(2016)0450 – C8-0265/2016 – 2016/0208(COD)) (March 9, 2017).
154
The Prevention of Money Laundering Act, 2002, §3.
155
Id., §4.
156
Financial Ask Task Force was established in 1989 by the G-7 Summit in Paris to develop a coordinated
international response to money laundering.
157
India is a signatory to International Convention for the Suppression of the Financing of Terrorism (1999), UN
Convention Against Transnational Organized Crimes (2000), UN Convention Against Corruption (2003).
158
See The Prevention of Money Laundering Act, 2002, §2(1)(wa) (A reporting entity includes a banking company,
financial institution, intermediary or a person carrying on a designated business or profession; See also The
Prevention of Money Laundering Act, 2002, §2(1)(sa) (It defines ‘persons carrying on a designated business or
profession’. Obviously, a bitcoin exchange/wallet operator is not a banking company or financial institution and is
also not a ‘person carrying a designated business or profession as per the definition prescribed under the Act (which
includes real estate agents, dealers in precious metals or high value goods, persons engaged in safekeeping of cash
and liquid securities, activities for playing games of chance and activities as may be specified by Central
Government from time to time)).
159
See The Income Tax Act, 1961, §285BA (India is a joining party to a currently 100-member states strong
Multilateral Competent Authority Agreement which implements exchange of information based on CRS norms. As
at August 1, 2017, it has signed a bilateral agreement with fifty-three countries for exchange of information. It has
also signed Inter-Governmental Agreement with USA for the implementation of FATCA in India).
160
The Income Tax Rules, 1962, Rule 114F(7) (Reporting Financial Institution, as defined in this rule, means a
financial institution which is resident in India, but excludes any branch of such institution that is located outside
India and any branch of a financial institution which is not resident in India, if that branch is located in India).
161
Id., Rule 114F (3).

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It is apparent that the obstacle to tax compliance here is not the lack of statutory
provisions but the inability of the government to recognise a tax event and then enforce laws on
it. Even the strenuous principles of international taxation through their system of bilateral tax
arrangements, fail to provide an answer to the complex electronic transactions such as this,
where multiple jurisdictions coupled with the prospect of anonymity are involved.162 It is
recommended, therefore, to establish institutions based on mutual consensus and improved co-
operation of several taxing jurisdictions in information sharing to tackle this emerging threat.
Possible measures also include imposing a taxable event on conversion of virtual currencies into
fiat currencies, mandatory licensing of businesses in virtual currencies,163 or reporting norms to
gather information at every purchase of tangible/intangible goods through bitcoins. Concerns
over the abuse of this novel technology will only increase with time and the government will
need to be wary of the disruptions it could bring to the erstwhile law enforcement. Working
alongside other jurisdictions and being a step ahead in combatting crypto-crime is what is
required, should India wish to utilise the unlimited potential of FinTech to its advantage.

V. EVOLVING INTERNATIONAL PRACTICES

The increasing acceptance of cryptocurrencies has raised eyebrows throughout the

world. A number of jurisdictions have introduced legislations to establish framework regarding
regulation of cryptocurrencies.164 Conflicting positions have been adopted by different countries,
with some considering bitcoins as ‘money’ or ‘unit of account’ thereby exempting charge to tax,
and others as ‘capital property’, consequently chargeable to capital gains tax. The USA FinCEN
(Financial Crimes Enforcement Network), being at the forefront of regulation of
cryptocurrencies, issued a guidance on regulating decentralised virtual currencies bringing them
within the ambit of the Bank Secrecy Act, 1970.165 As per the US Internal Revenue Service
(‘IRS’), cryptocurrencies are treated as property for the purpose of federal tax.166 Germany
formally recognised bitcoins as units of account allowing them to be used for tax and private

162
See Kyrie E. Thorpe, International Taxation of Electronic Commerce: Is the Internet Age Rendering the Concept
of Permanent Establishment Obsolete? 11 EMORY INT'L L. REV. 633, 634 (1997).
163
A similar framework is being pursued by New York State Department of Financial Services (NYDFS) to regulate
bitcoins.
164
See Shri R. Gandhi, Deputy Governor, Reserve Bank of India, Inaugaral speech at the FinTech Conference
(March 10, 2017), available at https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=16773 (Last visited on July 1,
2017).
165
FinCEN, Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual
Currencies, March 18, 2013, available at https://www.fincen.gov/resources/statutes-
regulations/guidance/application-fincens-regulations-persons-administering (Last visited on July 2, 2017) (As per
this guidance, administrators of bitcoins are subjected to regulation as ‘Money Services Business’ (MSB) under the
Bank Secrecy Act).
166
United States Government Accountability Office, Virtual Economies and Currencies: Additional IRS Guidance
Could Reduce Tax Compliance Risks, May, 2013, available at http://www.gao.gov/assets/660/654620.pdf (Last
visited on May 12, 2017) (The Internal Revenue Service seems to have adopted the Glenshaw Glass rule (given in
the case of Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)) in treating bitcoins as property. Glenshaw
rule provides a three-fold test to determine whether a gain in income is taxable, the three factors being accession of
wealth, realisation and complete dominion of wealth).

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

trading purposes throughout the country.167 In the United Kingdom ('UK'), they are classified as
an asset or private money, on which capital gains tax is applicable, but VAT is exempted.168 The
UK Government also intends to bring digital currency exchange firms within the ambit of anti-
money laundering regulations.169
While including bitcoins within the ambit of tax seems necessary, some countries
have excluded bitcoins for tax purposes to encourage its trading. For instance, Japan exempted
the supply of virtual currencies such as bitcoin from Japanese Consumption Tax (‘JCT’) since
July 1, 2017, which was earlier charged at the rate of eight percent.170 Previously, Japan had
recognised digital currencies as ‘real money’, in order to promote innovative financial services
like ‘FinTech’.171 The treatment of cryptocurrencies in Japan could serve as a catalyst for
widespread adoption of bitcoins as a medium of exchange.172
In Australia, digital currencies were previously considered ‘intangible property’
and were therefore subject to GST.173 However, this resulted in cascading effect of taxes, as
consumers transacting in digital currencies had to bear GST twice, first, on purchase of digital
currency and second, on exchange of digital currency for other goods and services. As promised
in the Budget 2017-18 released by the Department of Treasury,174 the Government on September
14, 2017, introduced a legislation to exempt digital currencies from the purview of GST
retrospectively from July 1, 2017, allowing it to be treated ‘just like physical money’ for GST
purposes.175
A discussion on cryptocurrencies and its regulatory framework is incomplete
without China, which is the biggest market of cryptocurrencies in the world. Due to excessive

167
Charles Arthur, Bitcoin now 'Unit Of Account' in Germany, August 19, 2013, available at
https://www.theguardian.com/technology/2013/aug/19/bitcoin-unit-of-account-germany (Last visited on July 2,
2017).
168
Pete Rizzo, UK Eliminates Tax on Bitcoin Trading, Publishes Official Guidance, March 2, 2014, available at
http://www.coindesk.com/top-uk-tax-agency-eliminate-20-levy-bitcoin-trading/ (Last visited on June 23, 2017).
169
HM Treasury, Action Plan For Anti-Money Laundering And Counter-Terrorist Finance, 18-19, April, 2016,
available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517992/6-2118-
Action_Plan_for_Anti-Money_Laundering__web_.pdf (Last visited on June 24, 2017).
170
Joseph Young, It’s Official: Japan Has Eliminated Tax on Bitcoin, Rise in Trading Expected, July 3, 2017,
available at https://cointelegraph.com/news/its-official-japan-has-eliminated-tax-on-bitcoin-rise-in-trading-expected
(Last visited on July 10, 2017).
171
Kyodo, Japan OKs Recognizing Virtual Currencies As Similar To Real Money, March 4, 2016, available at
http://www.japantimes.co.jp/news/2016/03/04/business/tech/japan-oks-recognizing-virtual-currencies-similar-real-
money/#.WWnDLoh97IU (Last visited on June 11, 2017).
172
Tom Rees, Regulating Bitcoin: How New Frameworks Could Be A Catalyst For Cryptocurrencies, April 16,
2017, available at http://www.telegraph.co.uk/business/2017/04/16/regulating-bitcoin-new-frameworks-could-
catalyst-cryptocurrencies/ (Last visited on May 4, 2017).
173
See Australian Taxation Office, Goods And Services Tax: The GST Implications Of Transactions Involving
Bitcoin, August 20, 2014, available at
http://law.ato.gov.au/atolaw/view.htm?locid=%27DGS/GSTR2014D3/NAT/ATO/fp15%27&PiT=99991231235958
#fp15 (Last visited on June 19, 2017).
174
Department of Treasury, Government of Australia, Budget 2017-18, available at http://www.budget.gov.au/2017-
18/content/glossies/factsheets/html/FS_innovation.htm (Last visited on July 4, 2017); William Suberg, Bitcoin To
Become ‘Just Like Money’ In Australia July 1, available at https://cointelegraph.com/news/bitcoin-to-become-just-
like-money-in-australia-july-1 (Last visited on June 5, 2017).
175
Department of Treasury, Government of Australia, Press Release, September 14, 2017, available at
http://sjm.ministers.treasury.gov.au/media-release/089-2017 (Last visited on September 28, 2017).

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

foreign investment limitations to access international markets, an alternative investment

opportunity is provided to its citizens through bitcoin trading.176 Although no regulation governs
cryptocurrency in China, the Government has taken an aggressive stance towards digital
currencies. Recently, the People’s Bank of China conducted on-site inspections of bitcoin
exchanges and plans to impose penalties on these exchanges for violating upgraded norms
related to anti-money laundering.177 However, despite heightened control, the use of
cryptocurrencies has not faltered much,178 giving good proof that strict regulation and excessive
control is not the answer, as far as cryptocurrencies are concerned.
Given the monumental rise in cryptocurrencies and its obvious role in financial
technology in the coming years,179 the question is not whether India should adopt a regulatory
framework or not; the relevant question in this regard is which regulatory framework would be
best suited to India and its underlying need for economic growth and financial inclusion. A
perfect regulatory success would be to regulate bitcoins in a manner that permits a reasonable
balance between consumer security and legitimacy. This sandbox approach will ensure financial
innovation and transparency and give a boost to economic growth, all of which are primary
objectives of the Government,180 while at the same time ensuring regulatory bottlenecks and
compliance costs are not too much to deter businesses from participating in FinTech in India.
The robust nature of blockchain make regulation in this area inevitable, sooner or later. Recently,
a major news agency reported that the RBI is considering the creation of a ‘fiat cryptocurrency’
(apparently called ‘Lakshmi’) as an alternative to Indian Rupee for transactions carried out
electronically.181 It is stated that such moves are counterintuitive, as bitcoin was established for
the exact purpose of depriving the government and central bank of their regulatory
supervision.182
In my opinion, the Australian/Japanese approach to taxation of cryptocurrencies
would be a suitable model to adopt for India, if it aims to become a global FinTech hub in years
to come. Australia legitimises bitcoin trading and treats it as money for GST purposes,183 while
Japan excludes bitcoins from its previous eight percent JCT.184 Currently, regulatory

176
Gautham, China, Driving the Bitcoin Wagon with BitMex and Others, December 5, 2015, available at
http://www.newsbtc.com/2015/12/05/china-driving-bitcoin-wagon-withbitmex/ (Last visited on June 2, 2017).
177
Kevin Helms, Regulations for Chinese Bitcoin Exchanges Expected in June, Withdrawals Could Soon Follow,
May 11, 2017, available at https://news.bitcoin.com/regulations-chinese-bitcoin-exchanges-expected-june-
withdrawals-follow/ (Last visited on June 5, 2017).
178
Bill Birtles, Beijing's Moves to Reign In Bitcoin Aren't Deterring China's New Crypto-Currency Kings, April 17,
2017, available at http://www.abc.net.au/news/2017-04-17/chinas-new-cryptocurrency-kings-not-fazed-by-
regulation/8447094 (Last visited on June 4, 2017).
179
World Economic Forum, The Future of Financial Infrastructure - An Ambitious Look At How Blockchain Can
Reshape Financial Services, August, 2016, available at
http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf (Last visited on September 30,
2017).
180
Vikas Dhoot, Regulators Shouldn’t Restrain Innovation, July 29, 2017, available at
http://www.thehindu.com/todays-paper/tp-business/regulators-shouldnt-restrain-innovation/article19382071.ece
(Last visited on September 29, 2017).
181
The Economic Times, Another Experiment with Currency? RBI is looking at its own Bitcoin, September 16,
2017, available at http://economictimes.indiatimes.com/news/economy/policy/another-experiment-with-currency-
rbi-is-looking-at-its-own-bitcoin/articleshow/60710700.cms (Last visited on September 29, 2017).
182
Nakamuto, supra note 6, ¶1.
183
Supra note 175.
184
See supra text accompanying notes 169-171.

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uncertainties and a fairly repulsive approach to innovative entrants by the Government in

banking, financial services and insurance sector ('BFSI') is a major barrier for cryptocurrencies.
Furthermore, a benevolent yet firm stand on blockchain and other alternative technologies also
aligns with the interest of the Government in providing digital substitutes to evasive cash
transactions. A study estimates that India already provides the highest return on FinTech
investments at an expected return on investment of twenty-nine percent, well ahead of its global
counterparts.185 Easing the high entry barriers in BFSI would convalesce competition and benefit
consumers, while also advancing the goal of financial inclusion.
Dr. Raghuram Rajan, the former Governor of the RBI while explaining the
philosophy of RBI to stay clear of danger through innovation in financial sector until
development of a clear understanding quoted a Chinese saying, "Cross the river while feeling the
stones".186 The time for cryptocurrencies is ripe and taking cue from previous governors, we can
only expect regulators to take a positive step in regulating cryptocurrencies, while taking ‘some’
risks in the interests of the nation.
VI. CONCLUSION

In India, approximately one-fifth of the population remains unbanked.187 For

individuals not having access to basic credit facilities, banking alternatives such as virtual
currencies could provide an unparalleled solution due to their universal access, low transaction
costs, and secured infrastructure.188 Friedrich Hayek, economist and Nobel laureate said, "Good
money can come only from self-interest, not from benevolence (of government)".189 In actuality,
it seems perfectly logical for digital currencies to overcome traditional currency in the long run.
The growth of bitcoins as a ‘near-perfect’ alternative to the prevailing issues in fiat currency
makes it evident that legal uncertainty and the unstructured taxation (or non-taxation) regime
will only affect the interests of entrepreneurs, investors and miners in India, not to mention the
money laundering, terrorist financing and offshore tax havens.

In comparison to other forms of legislations, the laws of taxation should

continuously evolve to discourage evasionary practices. Although the success of bitcoins as a
medium of exchange is not factual, it seems highly promising and revolutionary and therefore
demands serious thought. Unlike major economies, India is yet to come up with a regulation to
govern cryptocurrencies, let alone to determine its tax consideration. Implementation of General
Anti Avoidance Rules should empower the Department to some extent to review arrangements in
cryptocurrencies entered for tax avoidance purposes. It is proposed that KYC norms/anti-money
laundering standards currently applicable to financial institutions and banks be extended to

185
PWC, Redrawing the Lines: FinTech’s Growing Influence on Financial Services, 2017, available at
https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-global-fintech-report-2017.pdf (Last visited on
October 2, 2017).
186
Dr. Raghuram G. Rajan, Ex-Governor, Reserve Bank of India, Keynote Address at the 4th C.K. Prahalad
Memorial Lecture, Mumbai: Sustainable Growth in the Financial Sector (September 18, 2015), available at
https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=976 (Last visited on October 1, 2017).
187
EY-ASSOCHAM KNOWLEDGE REPORT, Evolving Landscape of Financial Institutions in India, July, 2016,
available at http://www.ey.com/Publication/vwLUAssets/ey-evolving-landscape-of-microfinance-institutions-in-
india/$FILE/ey-evolving-landscape-of-microfinance-institutions-in-india.pdf (Last visited on June 12, 2017).
188
Scott, supra note 9.
189
HAYEK, supra note 1, 131.

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 NUJS Law Review 10 NUJS L. Rev. 3 (2017)

bitcoin exchanges and wallet operators, as they remain the point of transaction in most cases.190
The structure of taxation prescribed in this paper overviews direct and indirect taxation in both
circumstances; cryptocurrencies being considered as goods/commodities and currency. However,
much remains to be answered still, given the statelessness of the internet and the spectral
character of bitcoins.
Nevertheless, given what the future holds for bitcoins and blockchain technology,
there is no better time than now to establish clear rules and regulations both in relation to
regulatory aspects and taxation, to subsequently ensure their stability and security.

190
See Reserve Bank of India, Master Circular, Know Your Customer (KYC) norms/Anti-Money Laundering (AML)
standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under Prevention of Money Laundering
Act, (PMLA), 2002, RBI/2014-15/70 (Issued on July 1, 2014), available at
https://www.rbi.org.in/scripts/bs_viewmascirculardetails.aspx?id=9031#MC (Last visited on June 2, 2017) (For
more information on applicability of KYC/AML norms).

October –December, 2017

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