When Modern-day Tony Stark a.k.a Elon Musk tweeted that cryptocurrencies were “potentially promising”, the value of these digital currencies skyrocketed and saw unprecedented exponential growth, globally. While cynics remain skeptical, crypto enthusiasts remain optimistic and vouch for a lot of potentials.
The “crypto boom” is a recent phenomenon and many countries across the globe have sought time to regulate the same. On the other hand, many countries have at present decided to not allow cryptocurrency trading in their markets owing to its high rate of volatility and the amount of risk involved. So where does India stand?
Now, the only available jurisprudence on cryptocurrencies in India is the judgment of the apex court in the case of Internet and Mobile Association of India v. Reserve Bank of India. The reasoned order quashed the RBI guidelines which prohibited commercial banks from dealing in digital currencies and subsequently directed RBI to pass guidelines to regulate the same. The judgment being pro-cryptocurrencies, one may draw an inference that this judgment might lay the foundation stone for legislation that might regulate cryptocurrencies in India in the near future.
Once regulated, it is certain that cryptocurrencies will have tax implications. A very important tax provision in this regard will be that of Equalisation Levy which is fundamental in taxing the digital economy. This article shall try to analyze a hypothetical question as to whether cryptocurrencies can be subjected to an Equalisation Levy?
Fundamentals of tax prescribe for two policies of taxation. One is residence-based while the other is source-based. India conforms to both these policies – the residence-based taxation policy for its residents and the source-based taxation for aliens. Needless to mention, the same policy has been followed by multiple nations across the globe. A natural corollary of this policy is that it might lead to double taxation which might cause insurmountable harm to business entities. In order to mitigate the risks of double taxations, India has entered into various bilateral tax treaties known as Double Taxation Avoidance Agreements(“DTAA”).
DTAA’s are only applicable, subject to the presence of a permanent establishment. The term ‘permanent establishment’ means a “fixed place of business through which the business of an enterprise is wholly or partly carried on”. Article 7 of the OECD Model Convention states that a foreign enterprise is liable to tax in the source country on its business profits to the extent the profits are attributable to the permanent establishment in the source country. Hence on the application of international tax law, transactions of foreign entities should not attract any tax in the absence of a permanent establishment.
It was observed that this provision allowed tech giants and other big players of the digital economy to go tax free whereas companies with permanent establishments were caught in the cobweb of taxes. As a measure to overcome this, India became the first country to implement something known as an Equalisation levy.
The concept of an Equalisation Levy was brought in the year 2016 in order to tax digital transactions because the traditional approach of taxation based on the physical presence of a permanent establishment is not applicable to the digital market. An Equalisation Levy is a direct tax which the resident service recipient withholds at the time of payment to the non-resident service provider. At present, the rate of the Equalisation levy is 2%.
Now, it is important to note that the functioning of the cryptocurrency market is very similar to that of any Equity market. Multiple virtual currency exchange platforms have come up and it is in these markets that Miners trade their cryptocurrency. Now, assuming a miner from Germany trades or sells his cryptocurrencies through these virtual currency exchange platforms such as coin base to a person residing in India and suppose the Indian resident is wanting to buy two bitcoins, the consideration in fiat currency that he would have to pay is approximately 7 million or 70 lakhs. It is a high-value transaction but in the absence of a permanent establishment and the government not being able to attribute these profits to the permanent establishment, there is a high probability that both parties may evade taxes.
If the government wants to capitalize on these transactions, it can try to attribute the idea of an Equalisation Levy or anything similar, to these transactions. The government can enforce an Equalisation levy upon the resident Indian so that he holds back a certain amount as tax. The concept of an Equalisation Levy is all the more important because the government will not be able to attribute and extract taxes from such transactions under the traditional concept of “heads of income”.
The inception of cryptocurrencies was triggered by the great recession of 2008. The recession was primarily caused due to unsecured lending by major players of the financial market, banks in particular. Satoshi Nakamoto, the father of bitcoin, came up with the idea of a digital currency that would allow secure, peer-to-peer transactions without the involvement of any middleman, whether that be the government, bank, financial system, or a company. The idea was to decentralize the system and enhance the transparency of ledgers. Governments have opposed cryptos for this very reason because it vouches for a globally decentralized system that seeks to transfer financial power onto the hands of the common people instead of the government or the banks.
Governments have remained skeptical because they are failing to understand that data is the new oil. As for a country like India, even the Internet is a recent phenomenon but it is pertinent to observe the revolution that it has brought about. If India aspires to be a true global leader and achieve the goal of a 5 trillion economy it must certainly not pay a blind eye to the realities of the world, especially the virtual world because it is what the future beholds. Cryptocurrencies are there to stay and it would only be prudent for the government to establish a robust regulatory framework for the same.
Siddharth Krishnan is a student at the School of Law, Sastra University.
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