In the past 1-2 years we have seen a lot of growth in the cryptocurrency market in India and people are investing huge amount in cryptocurrency. However, in this post let’s understand what are the tax implications on business if they accept or make payment using cryptocurrency.
We shall understand tax implication under GST and Income tax, but first let’s make a small discussion about disclosure of cryptocurrency in Balance sheet as required by MCA.
Ministry of Corporate Affairs have asked to disclose the following details in relation to cryptocurrency or virtual currency:
Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial year, the following shall be disclosed:-
- profit or loss on transactions involving Crypto currency or Virtual Currency
- amount of currency held as at the reporting date,
- deposits or advances from any person for the purpose of trading or investing in Crypto Currency/virtual currency.
To read more about MCA circular CLICK HERE.
Now let us discuss about the existing Income tax provision relating to accepting Cryptocurrency against sale of goods or service and making payment using cryptocurrency.
Making Payment using Cryptocurrency under Income tax:
Section 40A(3) of the Income tax act deals with making payment for any expense and same is reproduced as under:
“Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.”
Other prescribed electronic modes are:
(a) Credit Card;
(b) Debit Card;
(c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer); and
(h) BHIM (Bharat Interface for Money) Aadhar Pay;
Thus, based on the above section if a person makes any payment above Rs. 10,000 in any other mode than the one’s prescribed above then such expense shall be disallowed from his business expenditure.
Accepting payment as Cryptocurrency under Income tax act:
Section 269ST of the Income tax act, deals with penalty while accepting payment and relevant extract of same is as under:
“No person shall receive an amount of two lakh rupees or more—
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person,
otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed”
Other modes prescribed in the section are similar to those mentioned above.
Hence, this section also states that if a person receives any payment above Rs. 2 lakh in any other mode then same shall be liable to 100% penalty of the amount received in such mode under section 271DA of the Income tax act.
Hence, one should not accept any payment in any other mode above Rs. 2 lakh.
Although both the above provisions were introduced with an intention to reduce cash transaction but it advisable to not use cryptocurrency in violation of above provision as same could attract penalty and disallowance.
Impact of accepting Cryptocurrency under GST:
Majorly Cryptocurrency is received as a payment when one provides goods or services outside India and there are various benefits in case of export of goods and services. However, to take those benefits one should fulfill various conditions as under:
“Section 2(6) of the IGST defines “export of services under GST” as the provision of any service that meets the following conditions:
- Both the beneficiary and service provider is located outside India
- Either one of them is not located in India
- Both are not just foundations of an unmistakable individual supply of services having a place in Bhutan or Nepal, against payment in Indian currency, is absolved regardless of whether the payment is gotten in Indian currency taking a gander at the business approaches and patterns
- The payment for such assistance has been obtained by the service provider in convertible foreign exchange.“
One of the conditions for a service to be considered as export of service the payment should be received in form of Convertible Foreign exchange.
As per FEMA regulations Cryptocurrency is still not covered under convertible foreign exchange and hence if you accept payment for export in cryptocurrency same won’t be eligible for benefit of export of service under GST.
Thus, based on the above discussion it is not advisable to do any business transaction in cryptocurrency until we have more clarification from the government.
This are just initial thoughts, one can comment if they have any other information and help others. Also, during the ongoing winter session a bill for cryptocurrency will also be presented which might bring more clarity on above topic.
Disclaimer: The views presented in the above article are personal views of our team (based on information available on public domain) and has no legal binding. For any legal opinion consult a tax professional.
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