Crypto Industry 2020

by Wadhwa & Shah | May 5, 2020 | Taxation

Cryptocurrency

Crypto in India has always been something which is not understood by majority masses. India having one of the largest economy in the world, would always fear something which has a potential to replace the fiat currency primarily because it does not have a know how to curb the wrong practices which can result out of crypto trading. One must learn out of the technology which is used by the crypto traders and the platforms instead of criticizing it. Since the time of evolution, the Indian Regulators have been concerned about the use of crypto currency for illegitimate transactions. Having said that, RBI sandbox had explicitly excluded the usages of cryptos despite that fact that other regulators allow the usage of cryptos in their sandbox with a cap on it. There should be no harm in regulators allowing such usage to evolve along with the technology.

Updates

RBI had earlier restricted all the banks from encouraging the crypto traders/ platforms from operating a bank account in India. The banks had therefore paused their operations with such traders/ platforms after giving them a window. After getting these regulations, the crypto platforms had shut their practices in India and moved to other jurisdictions which are more crypto friendly. This had even led to loss of many such jobs.

Amid such actions, the trades/ platforms of such crypto currency had received notices from other departments such as income tax and GST in order to explain the transactions and loss of revenue to the Indian Government. Many such responses were submitted by all such assesses, however, no further communications have been so far received by such assesses primarily since there is no clarity or treatment specified specifically for crypto trades/ profits in these acts/ rules. Subsequently, early this March, Supreme Court had come with its ruling wherein it ordered RBI to remove its curbs which were put in place for crypto traders/ platforms.

After this ruling, RBI had filed a review petition with the SC which was scheduled for hearing in April 2020, but in this lockdown, it can be expected to get prolonged. It is also expected that the RBI may get regulations in place to regulate the crypto market which is proposed to restrict the cryptos to be used for the purpose of payment systems. Having said that, only trades between the cryptos would be allowed which would probably be required to be reported on regular intervals to the regulator. This would curb a lot of regulations on the platforms and exchanges.

Taxation related

DIRECT TAXES

Having understood the approach of the regulators towards the crypto trades, it is very important for the crypto platforms/ exchanges and trades to understand the tax exposure which they carry for carrying out the trades in such virtual currencies:

Currently, there are more than 1500 types of crypto currencies which are being traded on multiple exchanges and platforms. Further, the traders who trade on this technology driven platforms always have questions on the tax treatment. It is to be noted that the Income-tax department or the department of indirect taxes has not released any such specific treatment of such crypto income which is accrued by such trades/ platforms/ exchanges which gets even more ambiguity on the treatment.

A lot of times, the treatment is dependent on the strategies which are used by the trader to multiply its cryptos. Its more simpler for the exchanges and platforms to understand the tax treatment since they have to pay taxes on the income accrued, unless they have stocked up the cryptos themselves. Earlier, since the cryptos were strictly restricted for use by the RBI in India, there was a stand taken by the tax payers by assuming such cryptos at nil value as these did not have real value in Indian markets as they could not be monetized readily in India. However, now that the SC has asked the regulator to remove such curb and since many of the bankers have started allowing such trades again, a question is to whether such accruals in cryptos by the traders is to be offered to tax? This would have to be analysed case to case.

It is always advised that a conservative approach is taken when there is no clarity available from the department on the treatment. The players in market accrue income in the form of trading, arbitraging, mining, peer to peer, etc. which may or may not be monetised, but the relevant exposure needs to be considered.

INDIRECT TAXES

GST is another question which such players in market are not clear about, considering no clarification on such transactions has been provided by the department of indirect taxes, it is important that one takes a conservative view. Many exchanges in India are currently paying GST on the fee portion collected from the customers for paying the same to the department. The traders also need to analyse the implications of GST on the P2P sales which are executed by them since those have profit element too. It is important to note that the term cryptocurrencies have not been included or defined anywhere in the act/ rules and therefore deciding the treatment of such transactions are very important before the same are made.

Conclusion

The market of crypto currency is very immature in India and the assesses dealing in such trades are unaware of the real treatment in accounts and tax. It is therefore important for the regulators to come out with some clarity. Delaying in getting proper clarity and treatment would lead to different treatments being given by different assesses plus this would further increase the scope of reopening of the assessments by the authorities to tax the past profits of the assesses. The tax authorities may consider getting in transaction tax approach on these trades where each transactions can be considered to be separately taxes like STT (security transaction tax) since the volumes of such trades are huge. Additionally, reporting systems can be introduced to ensure completeness. This can be one of the best ways to get these transactions into the taxation umbrella.

Compliance under Rule 114F to 114H of Income

by Wadhwa & Shah | May 5, 2020 | Taxation

Compliance under Rule 114F to 114H of Income-tax Rules, 1962 for due to enactment of FATCA and CRS

Income-tax Rules, 1962 were amended vide Notification No. 62 of 2015 dated 7th August, 2015 by inserting Rules 114F to 114H and Form 61B to provide a legal basis for the Reporting Financial Institutions (RFIs) for maintaining and reporting information about the Reportable Accounts. These Rules have been developed in consultation with Regulators and Financial Institutions in order to address their concerns wherever possible. The due date for filing of Form 61B for the calendar year 2017 is 31 May 2018.

First, an entity needs to find out whether it is a Reporting Financial Institution. Then, Reporting Financial Institution needs to review their financial accounts by applying due diligence procedures to identify whether any of the financial account is a Reportable Account. If any account is identified as a reportable account, then the Reporting Financial Institution shall report the relevant information in Form 61B in respect of the identified reportable account.

Process of Reporting under FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard)

1. Identifying a Reporting Financial Institution (RFI)
2. Reviewing the Financial accounts of RFI
3. Identifying the Reportable Accounts by applying due diligence rules
4. Report the relevant information in respect of identified Reportable Accounts in Form 61B

1. Identifying a Reporting Financial Institution

RFI is defined in Rule 114F(7) to mean:-

• 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 (other than a non-reporting Financial

Institution) which is not resident in India, if that branch is located in India.

Financial Institution will not include Non-reporting Financial Institutions even though they satisfy the above conditions.

Following Steps may be followed to determine whether a person is a RFI and thus has reporting obligations:

Step 1: Is it an Entity?

Only Entities can be RFIs. The term “Entity” would include legal persons and

legal arrangements, such as corporations, partnerships, trusts, foundations and

HUF. Individuals, including sole proprietorships, are therefore not RFIs.

Step 2: Is the Entity a Financial Institution?

The definition of Financial Institution in the Rule 114F(3) classifies FIs in four different categories, namely

• Custodial Institutions,
• Depository Institutions,
• Investment Entities and
• Specified Insurance Companies.

1. Custodial Institutions

Custodial Institution is defined in Explanation (a) to Rule 114F(3) to mean any entity that holds, as a substantial portion of its business, financial assets for the account of others and where its income attributable to the holding of financial assets and related financial services equals or exceeds twenty percent of its gross income during the three financial years that end on 31 March prior to the year in which determination is made or the period during which the entity has been in existence, whichever period is less.

Entities such as central securities depositories (CSDL and NSDL), custodian banks, brokers, and depository participants, would generally be considered as custodial institutions.

2. Depository Institutions

Depository Institution is defined in Explanation (b) to Rule 114F(3) to mean any entity that accepts deposits in the ordinary course of a banking or similar business.

An Entity is considered to be engaged in a “banking or similar business” if, in the ordinary course of its business with customers, it regularly engages in activities such as:

• Accepts deposits or other similar investments of funds;
• Makes personal, mortgage, industrial, or other loans or provides other extensions of credit;
• Purchases, sells, discounts, or negotiates accounts receivable, instalment obligations, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness;
• Issues letters of credit and negotiates drafts drawn thereunder;
• Provides trust or fiduciary services;
• Finances foreign exchange transactions; or
• Enters into, purchases, or disposes of finance leases or leased assets.

Savings banks, commercial banks, savings and loan associations, credit unions, and Non-Banking Financial Companies (NBFCs) would generally be considered Depository Institutions.

3. Investment Entity

Explanation (c) to Rule 114F(3) defines two types of investment entities:

1. Entity’s primary business consists of one or more of the following activities for or on behalf of a customer, namely:-

• trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; or
• individual and collective portfolio management; or
• otherwise investing, administering, or managing financial assets or money on behalf of other persons; and

The gross income from such business activities has to be equal or more than 50% of the gross income over a three year period.

• Entity’s primary income is from business of investing, reinvesting, or trading in financial assets and such entity managed by another entity that is a depository institution, a custodial institution, an investment entity or a specified insurance company and also the gross income of the entity from such business activities is more than 50% of the entities gross income over a three year period.

Exception

An investment entity established in India that is a financial institution, will be treated as Non-Reporting Financial Institution (See para 2.5), if it only

• renders investment advice to, and acts on behalf of; or
• manages portfolios for, and acts on behalf of; or
• executes trades on behalf of,

a customer for the purposes of investing, managing, or administering funds or securities deposited in the name of the customer with a financial institution other than a non-participating financial institution.

4. Specified Insurance Company

Specified Insurance Company is defined in Explanation (d) to Rule 114F(3) to mean any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract.

A “cash value insurance contract” is defined in Explanation (f) of Rule 114F(1) and it means an insurance contract (other than an indemnity reinsurance contract between two insurance companies) that has a cash value. For US Reportable account, a threshold of USD 50,000 has been provided.

Similarly, annuity contract has been defined in Explanation (e) of Rule 114F(1).

A single premium life insurance contract which does not permit an amount to be paid on surrender or termination of the contract and which does not allow amounts to be borrowed under or with regard to the contract, shall not constitute a cash value insurance contract.

Insurance companies that only provide General Insurance or term Life Insurance should not be Financial Institutions and neither will reinsurance companies that only provide indemnity reinsurance contracts.

If a reporting entity qualifies for more than one category of financial institutions [eg. (i) Depository Institution (ii) Custodial Institution] then the reporting entity should get registered for all different categories and submit different form 61B for different type of financial institutions.

There may be a situation in which one FI maintains more than one type of accounts [for example both Depository as well as Custodial account], however, the FI may qualify as only one type of financial institution. In this case, FI shall register only as one type of financial institution but will report both types of accounts.

For example, there may be one financial institution X which qualifies only as Depository Institution and maintains both depository as well as custodial accounts. X will get registered only as Depository Institution but will report both types of accounts – depository as well as custodial accounts.

Step 3: Is the Financial Institution in India?

The Financial Institutions resident in India, their branches located in India and branches of Foreign Financial Institutions that are located in India are the Reporting Financial Institutions (RFIs) while Foreign Financial Institutions, their foreign branches and foreign branches of Indian Financial Institutions are not treated as RFI. In the case of Trusts, the reporting requirement is on the Trustees resident in India, unless the required information is being reported elsewhere because the trust is treated as resident there.

Step 4: Is the Financial Institution a Non-Reporting Financial Institution?

There are certain FIs which are not required to maintain or report the information. These FIs are called non-reporting financial institutions (NRFIs) and defined in Rule 114F(5).

The NRFI defined in the Rule are as under:

• A Governmental entity, International Organisation or Central Bank;
• A Treaty Qualified Retirement Fund; a Broad Participation Retirement Fund; a Narrow Participation Retirement Fund; or a Pension Fund of a Governmental entity, International Organization or Central Bank;
• A non-public fund of the armed forces, Employees’ State Insurance Fund,
• A gratuity fund or a provident fund;
• an entity that is an Indian financial institution only because it is an investment entity, provided that each direct holder of an equity interest in the entity is a financial institution referred to in sub-clauses (a) to (c);
• A qualified credit card issuer;
• An investment entity established in India that is a financial institution only because it (i) renders investment advice to, and acts on behalf of; or (ii) manages portfolios for, and acts on behalf of; or (iii) executes trades on behalf of, a customer for the purposes of investing, managing, or administering funds or securities deposited in the name of the customer with a financial institution other than a non-participating financial institution;
• an exempt collective investment vehicle;
• A trust established under any law for the time being in force to the extent that the trustee of the trust is a reporting financial institution and reports all information required to be reported under Rule 114G with respect to all reportable accounts of the trust;
• a financial institution with a local client base;
• a local bank;
• a financial institution with only low-value accounts;
• sponsored investment entity and controlled foreign corporation, in case of any U.S. reportable account;
• sponsored closely held investment vehicle, in case of any U.S. reportable account.

• Reviewing the Financial accounts of RFI

There are broadly five types of financial account. These accounts along with the institutions which maintain them are given below.

• Identifying the Reportable Accounts by applying due diligence rules

Once a RFI has identified the Financial Accounts maintained by them, they are required to review those accounts to identify whether any of them are Reportable Accounts. If any of the financial account is found to be reportable account, information in relation to those accounts must be reported in Form 61B.

In general terms, a Reportable Account means an account, which has been identified pursuant to the due diligence procedure, as held by

1. A reportable person; or
2. An entity, not based in United States of America, with one or more controlling persons that is a specified U.S. person; or
3. A passive non-financial entity (passive NFE) with one or more controlling persons that is a person described in sub-clause (b) of clause (8) of the rule 114F.

Thus, an account can be a Reportable Account by virtue of the Account Holder or by virtue of the Account Holders’ Controlling Persons. These rules have been laid down in the Guidance note issued for such reporting under FATCA dated 31.12.2015.

Due Diligence Procedure

The RFIs need to identify the Reportable Accounts by carrying out due diligence procedures. There are different due diligence procedures for the accounts held by individuals and accounts held by entities. There is a further classification of accounts as ‘Preexisting accounts’ and ‘New Accounts’. The standardized approach to be applied for carrying out due diligence procedure ensures quality of information to be reported and exchanged. The rules also utilize the information available under the existing processes such as those for Anti Money Laundering purposes. This is particularly the case for Preexisting Accounts where it is more challenging and costly for Financial Institutions to obtain new information from the Account Holder.

• Report the relevant information in respect of identified Reportable Accounts in Form 61B

After the RFI has identified the reportable accounts, RFI needs to report specific information in respect of each reportable account. As per Rule 114G(1), RFI needs to maintain and report the following information in case of each Reportable Account:-

• The name, address, taxpayer identification number (assigned to the account holder by the country or territory of his residence for tax purposes) and date and place of birth (in the case of an individual) of each reportable person, that is an account holder of the account;

• In the case of any entity which is an account holder and which, after application of due diligence procedures prescribed in rule 114H, is identified as having one or more controlling persons that is a reportable person,-

1. The name and address of the entity, taxpayer identification number assigned to the entity by the country or territory of its residence; and
2. The name, address, date and place of birth of each such controlling person and taxpayer identification number assigned to such controlling person by the country or territory of his residence;

• The account number (or functional equivalent in the absence of an account number);

• The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) at the end of relevant calendar year or, if the account was closed during such year, immediately before closure;

• In the case of any custodial account,-
• the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year; and
• the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;

• In the case of any depository account, the total gross amount of interest paid or credited to the account during the relevant calendar year;

• In the case of any account other than custodial or depository accounts, including accounts held by investment entities and cash value insurance contract and annuity, the total gross amount paid or credited to the account holder with respect to the account during the relevant calendar year with respect to which the reporting financial institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the relevant calendar year; and

• In the case of any account held by a non-participating financial institution, for the calendar year 2015 and 2016, the name of each non-participating financial institution to which payments have been made and the aggregate amount of payments.

Compliance requirements Rule 114B to 114D, Rule 114DB and Rule 114E

by Wadhwa & Shah | May 5, 2020 | Taxation

This write up has been taken up in three parts:-

PART I.

Rule 114B – Transactions in relation to which permanent account number is to be quoted in all documents for the purpose of clause (c) of sub-section (5) of section 139A

Rule 114C – Verification of Permanent Account Number in transaction specified in rule 114B

Rule 114D – Time and manner in which persons referred to in rule 114C shall furnish a statement containing particulars of Form No. 60

PART II.

Rule 114DB – Information and documents to be furnished under section 285A

PART III.

Rule 114E – Furnishing of statement of financial transactions

PART I

Rule 114B of the Rules lays down the criteria of transactions and the value of such transactions which require every person to quote his/ her PAN on all the requisite documents pertaining to such transaction. The list of 18 such transactions have been mentioned in the Rules which have been reproduced as under:

1. Sale or purchase of a motor vehicle or vehicle, as defined in clause (28) of section 2 of the Motor Vehicles Act, 1988 (59 of 1988) which requires registration by a registering authority under Chapter IV of that Act, other than two wheeled vehicles.
2. Opening an account [other than a time-deposit referred to at Sl. No.12 and a Basic Savings Bank Deposit Account] with a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act).
3. Making an application to any banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) or to any other company or institution, for issue of a credit or debit card.
4. Opening of a demat account with a depository, participant, custodian of securities or any other person registered under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).
5. Payment to a hotel or restaurant against a bill or bills at any one time.
6. Payment in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time
7. Payment to a Mutual Fund for purchase of its units.
8. Payment to a company or an institution for acquiring debentures or bonds issued by it.
9. Payment to the Reserve Bank of India, constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934) for acquiring bonds issued by it.
10. Deposit with,—
    1. banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act);
    1. Post Office.
11. Purchase of bank drafts or pay orders or banker’s cheques from a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act).
12. A time deposit with,—

(i) a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a Post Office;

(iii) a Nidhi referred to in section 406 of the Companies Act, 2013 (18 of 2013); or

(iv) a non-banking financial company which holds a certificate of registration under section 45-IA of the Reserve Bank of India Act, 1934 (2 of 1934), to hold or accept deposit from public.

1. Payment for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment instruments issued by Reserve Bank of India under section 18 of the Payment and Settlement Systems Act, 2007 (51 of 2007), to a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) or to any other company or institution.
2. Payment as life insurance premium to an insurer as defined in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).
3. A contract for sale or purchase of securities (other than shares) as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
4. Sale or purchase, by any person, of shares of a company not listed in a recognised stock exchange.
5. Sale or purchase of any immovable property.
6. Sale or purchase, by any person, of goods or services of any nature other than those specified at Sl. Nos. 1 to 17 of this Table, if any.

Quoting of PAN on the documents where the transactions are in the nature of above listed items, is mandatory. However, it would not apply to Central Government, the State Government and the Consular Offices; Non-residents for the transactions other than those mentioned at 1,2,3,4,7,8,10,12,14,15,16 and 17. Where, the person does not have a PAN, declaration in Form 60 is required to be made.

Rule 114C of the Rules makes it compulsory for the person receiving the documents in relation to transaction mentioned in Rule 114B, to verify that PAN has been duly mentioned on all the documents or Form 60 has been collected in cases where there is no PAN mentioned on the documents.

Rule 114D prescribes that the details in declaration collected for a particular financial year should be submitted to the Director of Income-tax (Intelligence and Criminal Investigation) or Joint Director of Income-tax (Intelligence and Criminal Investigation) as a part of Annual Information Reporting in Form 61 and that person should retain the Form 60 for a period of 6 years from the end of the Financial Year in which the transaction was undertaken. The due date of filing this Form 61 is 30 April 2018 for the FY 2017-18.

PART II

Section 285A introduced by Finance Act, 2015 w.e.f. 1-4-2016 prescribes to furnish information and documents by an Indian concern where any share of, or interest in, a company or an ‘entity registered or incorporated outside India’ derives, directly or indirectly, its value substantially from the assets located in India, as referred to in Explanation 5 to section 9(1)(i) of Income-tax Act, 1961 (‘the Act’), and such company or as the case may be entity holds directly or indirectly such assets in India through, or in, an Indian concern. The information is required to be furnished in Form 49D electronically under DSC to the AO having jurisdiction over the Indian concern within a period of 90 days from the end of financial year in which any transfer of the share of, or interest in, a company or entity incorporated outside India (as mentioned above) has taken place. Further, if such transfer has the effect of transfer of right in management or control on such Indian concern, then the information shall be furnished in the said form within 90 days of the transaction. The Rule also separately provides a list of documents which are required to be maintained and reproduced when called upon by the Income-tax authority.

PART III

Rule 114E was introduced after the introduction of section 285BA of the Act pertaining to statement of financial transactions, all the financial transactions mentioned in this Rule, if undertaken by the class of persons mentioned therein are required to be reported in Form 61A to the office of Director of Income-tax (Intelligence and Criminal Investigation) or Joint Director of Income-tax (Intelligence and Criminal Investigation). The due date for filing of this form for the FY 2017-18 is 31.05.2018. The list of financial transactions has been given below: