Taxation of Bitcoins or Crytocurrencies in India

Cryptocurrency in simple terms is “digital money” and Bitcoin is the first decentralized digital currency. It is not yet centrally administered or regulated by any specific body like the RBI which administers physical currency in India. The system works without a central bank or single administration.

India is not isolated from the rising popularity of bitcoins. According to industry sources, nearly 20000-plus crypto-enthusiasts trade daily on Indian bitcoin exchange platforms. Bitcoin trading can be extremely profitable for professionals or beginners. The market is new, highly fragmented with huge spreads. Arbitrage and margin trading are widely available. Therefore, many people make money trading bitcoins.

Thus, many taxpayers in India need to understand the Income Tax nuances of their bitcoin transactions.

Taxation of Bitcoins

Taxation of Bitcoins or Crytocurrencies

The concept of Bitcoins is new in India and there is no such law which lay down any provisions for taxability of Bitcoin gains. The Income Tax act 1962 does not contain any provision relating to cryptocurrencies but has always sought to tax income received irrespective of the form. Hence, Profit arising out of buying or selling of Bitcoin will be considered as Income and taxable in India in the hands of the receiver.

There has also been a debate about under which head income from crypto currency should fall. Let us understand each case one by one:

Trading:

Where there are too many trades in Bitcoins, the owner may be classified as a trader and income will have to be reported as Income from business to which the applicable slab rate of income tax would apply.

Investment:

If the transactions are not frequent and are in nature of investment in the currency, then any gains arising on transfer (ie: sale) should be characterized as Capital Gains. Accordingly these can be classified as long-term when held for more than 3 years and short-term when held for less than 3 years. Long-term capital gains will be taxed at 20% and short-term capital gains at 30%.

Indexation benefit (which is an adjustment to account for inflation for the period between purchase and sale of a capital asset) can be availed of. This would reduce the total tax outgo on capital gains.

Mining:

If bitcoins are earned through mining or other online activities, it can be treated as a Capital Asset and subsequent sale would give rise to Capital gains. However, it should be noted that the cost of acquisition of a bitcoin generated through mining, cannot be determined as it is a self-generated asset.


In the absence of specific guidance on the matter, some taxpayers may choose to report this income under the fifth head of income which is ‘Income from Other Sources’.” It is the head where residual income, income which cannot be reported under salary, house property, capital gains, business and profession, is reported.

As the concept of Bitcoin is gradually gaining immense importance in India, the government may soon come out with new Laws laying down provisions for taxability of cryptocurrencies which will dispel all ambiguity around the legality of bitcoins, taxability and disclosure requirements.

DISCLAIMER: This article is only for educational purpose and should not be considered as a legal or taxation advise.

Questions/ Comments can be sent by email to [email protected]

How to convert Proprietorship to a Private Limited Company

Many small business owners start out as sole proprietors of their firms. Sole proprietorship is the most common and simplest form of business structure. This form of business has its own advantages: easy formation, limited paperwork, small capital requirement, and minimum compliance requirements.

As the business starts spreading its roots, the next logical move would be to expand operations to accommodate large business needs. The experience acquired as a sole proprietor helps the entrepreneur to build a stronger foundation for his business when he chooses to transform it into a Private Limited Company.

 

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convert Proprietorship to a Private Limited Company

Choosing to Register a Private Limited Company

As the revenues increase, many sole proprietors perceive the need to differentiate their personal accounts and tax filings from that of the business. There are several reasons why converting your sole proprietorship into a private limited company is a good idea.

The conversion allows you to enjoy the double benefits of keeping your goodwill and brand value intact while enjoying a legal existence. You are not only exempted from paying any stamp duty, but also from any capital gains tax on the property thus transferred.

Other key benefits include:

  • Business expansion
  • Better financing options
  • Greater public visibility and acceptance
  • Asset protection
  • Managing risks
  • Corporate tax benefits

The conversion process

The first step to converting your sole proprietorship firm into a private limited company is to incorporate a new private limited company.

At the time of the new Private Limited Company, it is appropriate to mention in the Memorandum of Association (MOA) that the company is a “takeover of a sole proprietorship concern.”

After the Company Formation, an agreement needs to be executed between the Company and the Proprietor for the takeover of the assets and liabilities of the proprietorship by the Company. The details of assets, liabilities and the consideration in exchange of such assets need to be specified in the agreement.

The agreement should be executed in a Stamp Paper of requisite value to make it a valid legal document.

As per the Income Tax Act, 1961, capital gains on such transfers are exempted if:

  • All the assets and liabilities of the sole proprietorship, immediately before the conversion, are transferred to the company
  • The proprietor’s shareholding is more than 50% of the total voting rights of the new company for a continuous period of not less than 5 years from the date of succession
  • The proprietor receives shares in the Company only in exchange of the net assets of the business.
  • In case any of these conditions are not complied with, the profits or transfer of assets shall attract capital gains tax.

Once the new private limited company comes into existence, the sole proprietorship can be duly terminated. The bank accounts in the name of the proprietary firm need to be formally closed and a new corporate account is to be opened for the Company.

Any contracts/ leases/ agreements signed by the proprietor need to be re-signed under the name of the newly incorporated company.

All tax and other registrations in the name of the Proprietorship need to be surrendered and new registrations should be obtained in the name of the Private Limited Company.

What is Sweat Equity

The term Sweat Equity has recently gained immense importance in the corporate world. In simple terms, Sweat Equity shares refer to Equity Shares given to the employees of an organization in favorable terms, generally at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or other value additions to the Company.

Sweat Equity shares enable companies to increase directors’ and employee’s stake in the ownership of the company, thus encouraging them contribute more towards the development of the Company.

The issue of Sweat Equity Shares is regulated by Section 54 of the Companies Act, 2013 read with Companies Rule 8 of (Share Capital and Debentures) Rules, 2014

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Sweat Equity Shares

Who is eligible for Sweat Equity Shares?

  • A permanent employee of the company, its holding or subsidiary, whether working in or outside India for at least one year.
  • A director of the Company except Independent Directors.

Conditions for issue of Sweat Equity:

Quantum of Sweat Equity Shares:

  • The value of shares issued should not be more than 15% of paid up capital of the company in a year or Rs. 5 crore; whichever is less.
  • Total value of sweat equity shares issued by a Company shall not exceed 25% of the paid up capital of the company at any point of time.

Valuation of Sweat Equity Shares:

  • Sweat Equity Shares shall be valued at a price determined by a registered valuer.
  • When shares are issued in lieu of making available intellectual property rights or providing know-how, valuation of such Services or Know how shall also be carried out by Registered Valuer. Valuation of services or assets is important as that will determine the number of shares which are to be allotted.

Other Conditions:

  • For issue of Sweat Equity, the company should be in existence and carrying on business for a period of one year or more.
  • The sweat equity shares issued to directors or employees shall be locked in i.e.non-transferable for a period of three years from the date of allotment.
  • The amount of sweat equity shares issued shall be treated as part of managerial remuneration.
  • Only the class of shares which is already issued to the shareholders can be issued as sweat equity shares and all the conditions applicable to that class of equity shares shall be applicable to the sweat equity shares.
  • A listed company can issue sweat equity shares as per the rules and regulations prescribed by SEBI in this regard.

Procedure for Issue of Sweat Equity Shares as per Companies Act 2013

  • Obtain Approval of the Board of Directors for Issue of Sweat Equity
  • Obtain the Approval of the Shareholders of the Company for such issue through a Special Resolution.
  • Allotment of Sweat Equity is to be completed within 12 months of the date of passing the resolution by fulfilling all the applicable conditions.
  • File necessary e-forms with the MCA for such allotment.
  • Once the approval of MCA is obtained, the process of Issue of Sweat Equity Shares stands complete.
  • Maintain a Register of Sweat Equity Shares in Form No. SH.3
  • There should be a detailed disclosure in the Board Report of the Company about the terms and conditions of the Sweat Equity Shares issued.

It is suggested to formalize the agreement of issue of Sweat Equity on paper to avoid confusion and miscommunication. Building a restricted stock agreement, with a buy-back right can bring down risk. It is a good idea to hire a legal consultant or a finance expert to understand the fine lines better.

VenturEasy can help startups with sweat equity procedures. Email at [email protected].

How to close a private limited company

We come across various instances when small businesses are not able to sustain in this highly competitive era and prefer to get closed down, rather than running on losses. Many a times, startups prefer closing down a Company when the founder’s drop their business idea in view of an alternate lucrative opportunity.

The Companies Act 2013 provides various modes of closing of Companies. One of such ways is declaring the Company as “Defunct” and getting its name struck out from the records of Registrar. This is a hassle free and easy exit mode provided to Companies, which could not commence their business or are not in operations.

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How to Close a Private Limited Company

Eligibility to close down a Company:

  • A company which has failed to commence business within one year of Incorporation.
  • A company which is not carrying on any business or operation for a period of two immediately preceding financial years, and has not made any application for obtaining the status of a dormant company.

Conditions to be fulfilled before making the application:

  • The Company should have Nil assets and liabilities at the time of making the closure application
  • Consent of 75% of the members to be obtained by way of Special Resolution for this purpose.

Procedure:

  • An application should be made to Registrar for removal of name in form STK 2 along with fee of Rupees 5000 and the supporting documents.
  • On receipt of the application, the Registrar issues a notice to be published in the official gazette. The same notice should be placed in the website of the company, if any.
  • Form STK 2 shall be digitally signed by director authorized by the board or a physical copy of the form may be signed and provided as an attachment with the form.
  • The form should be duly certified by a CS, CA or CMA in Practice.

Documents Required:

  • Indemnity bond duly notarized by every director in Form STK 3
  • Statement of accounts containing assets and liabilities of the company made up to a day, not exceeding thirty days before the date of application and certified by a Chartered Accountant;
  • An affidavit in Form STK 4 provided by every director of the company;
  • Copy of Board Resolution authorizing the filing of the Application.
  • A copy of the special resolution accordingly certified by each of the directors of the company or consent of seventy five per cent of the members of the company as on the date of application
  • A statement regarding pending litigations involving the company, (if any)
  • Copy of order of the concerned regulatory authority, if any, approving the filing of the application
  • Copy of relevant order for delisting, if any, from the concerned Stock Exchange (for listed entities)

Note: The indemnity bond and declaration as mentioned above shall be duly notarized/consularised/apostilled (as the case may be) if the director is a foreign National or a non-Resident.

Fraudulent application for removal of name: If the application in this section is made with the intention to fraud creditors or any other person, then all responsible persons shall be held liable for the loss, and be punishable for fraud and may also be prosecuted.

Appeal to Tribunal: If any person is aggrieved by an order made under this section, then he has an option of making an appeal to the tribunal. But the appeal should be made within three years from the date of order.

Authorized Capital and Paid Up Capital

One of the most important decisions while registering a new company is deciding the Capital of the Company.  For taking an informed decision regarding the capital of the company, one should understand two basic concepts relating to capital i.e.  Authorized Capital and Paid Up Capital.

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Authorized Capital and Paid Up Capital

The following points of differentiation will give us a better understanding of the two concepts-

Meaning

  • Authorized Capital is the maximum amount of Share Capital that a company is authorized to have by its constitutional documents to issue to the shareholders. It is not necessary to issue the whole amount of the Authorized Capital; part of it can remain un-issued.
  • The amount of Share Capital that is issued to the shareholder and in exchange of which money is received from the shareholders is called the Paid Up Capital of the company.

Increase of Share Capital:

  • A Company can increase its Paid Up Capital by issuing further shares. However the Paid Up Capital cannot be more than the Authorized Capital.
  • A company can increase its Authorized Capital by altering its Memorandum of Association and increasing the Capital limit stated therein.
  • In view of the above, if a Company wants to increase its Paid Up Capital to an amount which is exceeding its Authorized Capital, then first the Authorized Capital has to be increased accordingly.

Payment of Stamp duty on Share Capital:

  • Stamp Duty is paid on the Authorized Share Capital of the Company.
  • Stamp duty is payable at the time of Company Incorporation and also at the time of increase in Authorized Capital.
  • Stamp duty is not required to be paid on the increase of Paid Up Capital of the company.
  • Rate of stamp duty on Authorized Capital varies from state to state.

Compliances under Companies Act, 2013:

  • Change in the Authorized Capital of the company requires filing of e-form SH7 within 30 days from the date of change.
  • Change in Paid Up Capital of the company requires filing of e-form PAS 3 within 30 days from the date of allotment of shares.