23 May 2018
India may levy Goods and Services Tax on cryptocurrency trading, according to people with direct knowledge of the matter, even as there’s lack of clarity about their legal status in the country.
The government may levy an 18 percent GST, the people said requesting anonymity as they weren’t authorised to speak to the media. The proposal, being considered by Central Board of Indirect Taxes and Customs, will be tabled before the GST Council after it’s finalised, they said.
Cryptocurrencies could be classified as intangible goods on a par with software, they said, adding that its use in illegal activities would have to be dealt with under other laws.
India hasn’t officially banned or legalised virtual currencies, but the government has, on multiple occasions, pointed to the risks involved. More so, after bitcoin surged 19 times to nearly $19,000 last year before losing most of its gains. The Reserve Bank of India in April barred lenders from dealing with entities trading in cryptocurrencies, giving them three months to unwind business. Crypto exchanges, however, moved the court against the directive.
The decision to tax cryptocurrencies will also hinge on the outcome of the panel set up to suggest a way to regulate them. BloombergQuint had earlier reported that while the Department of Economic Affairs seeks to regulate virtual currencies, investigative agencies want a ban.
The Income Tax Department also issued notices to cryptocurrency traders and is trying to recover dues. If such virtual currencies aren’t proactively taxed, the liability would increase and make recovery difficult, one of the people quoted above said. That’s why CBIC must also move in tandem, he said.
According to the proposal:
- Purchase or sale of cryptocurrencies should be considered as supply of goods, and those facilitating transactions like supply, transfer, storage, accounting, among others, will be treated as services.
- Value of a cryptocurrency may be determined based on the transaction value in rupees or the equivalent of any freely convertible foreign currency.
- If buyers and sellers are in India, the transaction would be treated as a supply of software and the buyer’s location will be the place of supply.
- For transfer and sale, the location of the registered person will be the place of supply. However, for sale to non-registered persons, location of the supplier would be considered as the place of supply.
- Transactions beyond the Indian territory will be liable for integrated GST, and would be considered as import or export of goods. IGST will be levied on cross-border supplies.
Retrospective Taxation Possible
The government can consider levying GST on crypto-trading retrospectively from July 1, 2017 — the day the new indirect tax regime was implemented, the people quoted above said. No decision has been made yet.
Virtual currencies did a monthly business of about Rs 200 crore, which if taxed at 18 percent for the 10-month period until April would fetch the government nearly Rs 360 crore in GST, according to one of the people quoted above. An industry expert who requested not to be quoted pegged the volumes in December 2017 at 10 times compared with March 2018.
Treating cryptocurrencies as goods and services may make taxation simpler. The government will have to just issue a circular that they were always liable to GST, Abhishek Jain, indirect tax partner at EY India, told BloombergQuint. But to tax them as a currency or a security will require a change in law, he said.
Tax On Mining
Bitcoins have to be mined, which is recorded in the blockchain, a public ledger of all transactions.
Mining will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees, according to people aware of the matter. Tax should be collected from the miner on transaction fees or reward, and if value of the reward exceeds Rs 20 lakh, individual miners will have to register under GST, they said.
Wallets storing keys that help users send and receive virtual currencies should also be taxed under the GST, according to the proposal. Wallet service providers will also have to register under GST.
Cryptocurrency exchanges will have to register under GST and pay tax on the commission they earn, according to the proposal. For exchanges located outside India, service provided by them to Indians would be considered import of a service, and they will have to pay IGST.
Legality Of Taxation
The government and the RBI have warned people against trading in cryptocurrencies since there is no underlying asset and that they were used in financing illegal activities. Taxation of services and exchanges throws up the question of legality in case India decides to ban the virtual currencies.
But the legality of an asset has bearing on taxability, the people quoted earlier said. A tax is a disincentive against an activity which is not legal, they said.
Indian crypto exchanges said a complete ban would be futile. The RBI’s move not allowing banks to transact with them will only push buyers and sellers towards other ways of settling trades.
“If courts do not come to our rescue, options for Indians willing to trade in cryptocurrencies would be crypto-to-crypto from rupee-to-crypto trade,” said Ajeet Khurana, chief executive officer of cryptocurrency exchange Zebpay. Globally as well, volumes in crypto-to-crypto trade are higher, he said.
Or, as Sathvik Vishwanath, chief executive officer of cryptocurrency exchange Unocoin, said, they could move to cash.