Indirect tax on cryptocurrencies may be implemented soon, as the government has started to work on a comprehensive regime for crypto assets. Framing these rules would prevent any loss of revenue to the exchequer due to the lack of clarity around the true nature of these assets, a recent report has said. The report also mentioned that cryptocurrencies may attract GST rates between 18 and 28 per cent, quoting people familiar with the development.
As per the report by Mint, the finance ministry aims to “define the characteristics of cryptocurrencies, their usage, and how they fit into the existing legal framework". Once the legal nature is decided, the appropriate GST rate will be set, the two sources said requesting annonimity.
“We are still discussing the applicability of GST in case of crypto assets…right now, it is levied on services… so we need to see if crypto assets are declared as a good or service. We can have a special rate for it. It may not necessarily be 18 per cent or 28 per cent. Maybe somewhere between that. We have had a few discussions on it and will arrive at a decision soon," one of the two people told the newspaper.
GST on Crypto: What Happens to the Current Tax Regime?
At present, the government levies a 30 per cent income tax on capital gains made through virtual digital assets and cryptocurrencies, while also charging a 1 per cent TDS while buying them. If GST on cryptocurrencies is imposed, it will mean that the government will charge an indirect tax on this asset, which is different from income tax and TDS that fall under the direct tax category.
“The only current tax regime applicable to crypto is direct tax or income tax. The current tax regime of Direct Tax at 30 per cent charged on ‘Income from Crypto Asset’ forms a part of our individual direct income. Whereas, GST is an indirect tax which is charged on sale or purchase of Goods and Services and the same is payable by an individual only in the capacity of a consumer. Meaning, even if crypto is brought under the purview of GST, the current direct tax regime will subsist," explained Sandeep Bajaj, Managing Partner at PSL Advocates & Solicitors.
“The current taxation regime is expected to be altered to accommodate taxation of crypto, especially with the possible introduction of a tax rate different from the currently existent slabs. More changes, however, depend entirely upon how the government treats crypto-related transactions," noted Nikhil Varma, Managing Partner at Miglani Varma & Co.
Ankit Jain, Partner at Ved Jain & Associates, added, “Till the finalisation of the rules around cryptocurrency, the applicability of GST has been informally kept in abeyance."
What Happens to Crypto Transactions with Introduction of GST Regime?
Till the government comes out with new tax rules for cryptocurrencies, ambiguity will prevail on how crypto transactions will be treated in the future. According to Aditya Chopra, Managing Partner at Victoriam Legalis, “Under the GST law, ‘goods’ inter alia means every kind of movable property other than money and securities. Further, ‘money’ means legal tender or foreign currency recognised by RBI, therefore, digital assets are not classified as ‘money’ under GST. Also, digital assets do not fall within the meaning of ‘security’ defined under GST law."
“If it (GST) is charged on the entire or gross value, then Crypto will be considered as a ‘Good’ and GST shall be levied, at the decided rate, on the price of such Crypto. Whereas, if it is levied on the service fees, any service fees or transaction fees for exchange of crypto will be subjected to the determined rate of GST," noted Bajaj.
How Will This Impact Crypto Trading in India?
Since the introduction of the income tax rule and the subsequent TDS provisions, crypto trading in India has taken a hit, with major exchange platforms recording lower volumes of trade.
“While imposition of Direct Tax on Crypto has already diluted the interest of investors, imposition of GST will further impact the same. On the other hand, the decision to tax Crypto is bound to put to rest the fears of investors qua an outright ban on crypto currencies in the country," said Bajaj.
Chopra said the trading volumes across the country will fall if such a regime is introduced. “The trading volumes across markets would fall and traders would move towards international exchanges, which do not fall under the purview of the Indian government. Also, customers would look to move their cryptocurrencies from exchanges to private wallets. It can also result in a direct connection between decentralised exchanges and customers for business activities," he said.
The trading of cryptocurrencies is also expected to become complicated, with exchanges having to maintain appropriate records of their clients to be able to comply them on real time basis.
“With the introduction of GST regime, trading in crypto would become quite complicated. The law would provide the type of traders who have to charge GST and those who don’t. Further, there may even be categories of traders who would be allowed input tax credit of GST paid on purchase of cryptos and those who won’t be allowed