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India considers implementing GST on Cryptocurrency

  • Feb 2, 2021 | Divita S Gupta

India considers implementing GST on Cryptocurrency

Summary

  • In an alleged report, the Centre is proposing the implementation of 18% GST on cryptocurrency transactions. 
  • Cryptocurrency businesses with an annual turnover exceeding ₹20 lakhs might be required to register on the GST portal.
  • Tax experts have stated that a high tax rate of 18% could prove to be unfavourable for India as cryptocurrency businesses are likely to move their transactions abroad. 

In a previous article, we had mentioned how cryptocurrency exchanges and platforms could create over 20,000 jobs across the nation with a potential market value of over 13 billion dollars. Owners of cryptocurrency platforms had even reached out to the Reserve Bank of India (RBI) seeking clarity on their tax status. India’s former indirect tax regimes of Sales Tax and Value Added Tax had also explored means to bring bitcoins under their taxation purview. 

Back in 2018, the RBI barred banks and financial institutions from transacting with cryptocurrency platforms and even though the Supreme Court ruled against this directive, the RBI did not instruct domestic banks to open doors to cryptocurrency platforms. Consequently, domestic banks denied cryptocurrency businesses services due to lack of clarity by the RBI.  

Now, two years later, the Central Economic Intelligence Bureau (CEIB) has raised a proposal to the Central Board for Indirect Taxes and Customs (CBIC) to bring cryptocurrency exchanges and platforms under the GST purview. With a potential of transactions hitting a value as high as ₹40,000 crore annually, the CBIC is considering the untapped tax revenue collected from implementing the Goods and Services Tax on cryptocurrency transactions. The CBIC is considering implementing 18% GST on the margins made while trading in cryptocurrency. 

The proposal shared by the CEIB featured the following salient points - 

  • The act of cryptocurrency mining could be treated as a supply of service as it generates cryptocurrency and charges transaction fees, and as such, should classify as an intangible asset and attract a GST of 18%
  • Taxpayers operating as cryptocurrency miners will be required to register under the Goods and Services Tax if their annual revenue exceeds ₹20 lakh. GST will be liable on the transaction fee and/or the reward viz. currency mined. 
  • This proposal is also considering bringing wallet service providers under the GST purview. 
  • Trading of cryptocurrency and other related transactions like transfer, storage, accounting etc are also likely to be considered as an act of supply and could be taxed.  
  • The transaction value in INR or an equivalent freely convertible foreign currency will be used to determine the value of cryptocurrency and thereby the transaction and subsequent tax liabilities. 
  • In cases where the buyer and seller are registered as Indian residents and operators, the transaction will be treated as a supply of software. 
  • International cryptocurrency transactions by companies registered in India will be treated as import or export of goods and as such will be liable to IGST. Another major reason to bring cryptocurrencies under the GST purview is to curb money laundering and undermining of legitimate currencies. 

India’s cryptocurrency industry is currently unregulated. The lack of a regulatory body or a regulatory framework could lead to hefty tax liabilities that are unlikely to be in favour of domestic cryptocurrency exchanges. Several indirect taxation experts believe that currency is not liable to tax in India, and as such, cryptocurrency should ideally not be brought under the GST purview. That being said, the currency exchange fee or brokerage can be subject to GST. 

Indirect tax experts have also stated that the GST rate of 18% is likely to lead India to lose out on cryptocurrency revenues and are demanding that cryptocurrency be treated as an asset class similar to that of gold where the total value is subject to tax. Still, the GST rate is lower than the standard taxation rates viz. between 1% and 3%. A tax rate as high as 18% is a first for cryptocurrency businesses anywhere. If implemented, India could lose out on tax revenues because businesses are likely to shift their transactions to cryptocurrency businesses to countries with lower tax rates. 

While the news report that mentioned 18% GST being implemented on bitcoin transactions is yet to be verified, it has set off alarm bells across cryptocurrency exchanges and platforms in India and could lead to a noteworthy debate in the near future. 

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Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Divita S Gupta
Avalara Author Divita S Gupta
Divita has served as a writer and editor for top financial services organizations in India. She has written on topics like mutual funds, insurance, taxes, SME financing for globally recognized banking and financial organizations including ICICI, Aditya Birla Group, News Corp. With a Masters in Business Administration from Symbiosis International University, she currently owns a small business in Mumbai.

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