Central government prepares indirect tax regime for crypto assets

Central government prepares indirect tax regime for crypto assets
Central government prepares indirect tax regime for crypto assets

BENGALURU, NEW DELHI : The government has started work on a comprehensive indirect tax regime for crypto-assets that will control any loss of revenue to the exchequer due to the ambiguity surrounding the true nature of these assets.

The finance ministry plans to define the characteristics of cryptocurrencies, their uses and how they fit into the existing legal framework, two people aware of government discussions said. Once its legal nature is determined, the correct GST rate will be decided, they said, requesting anonymity. There could even be a new GST slab between 18% and 28%, they added.

“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 may have a special rate for that. It is not necessarily 18% or 28%. Maybe somewhere in between. We’ve had some discussions about that and will come to a decision soon,” one of the two people said.

The measure indicates efforts by the indirect tax administration to catch up with changes in the world of technology and finance.

“A better understanding of how cryptocurrencies fit into our legal system is a prerequisite for the decision on the GST rate,” the second person said.

An email sent to the Treasury Department on Friday seeking comment on the story remained unanswered by press time.

Crypto-assets have been the subject of heated debates, with the Reserve Bank of India saying they are a threat to the country’s financial stability. In the meantime, the Center is in contact with multilateral agencies and the Bank for International Settlements to develop a consensus on the regulation of such assets.

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Experts said that while there is clarity on the levy of GST on the fee charged by cryptocurrency exchanges on transactions, there is ambiguity around transactions between parties outside an exchange as to whether it needs to be treated as a supply of goods or services or exchange of hands of money.

“Once there is regulatory clarity on the nature of cryptocurrency, and how transactions will be treated, it would be easier to align the tax framework with the regulatory framework,” said Abhishek Jain, partner, indirect tax at KPMG India.

Globally, central banks are skeptical of the decentralized finance trend because of the risk speculative cryptocurrency poses to financial stability, a warning that has proven prophetic following the sharp fall in the value of some of its currencies and the implosion of TerraUSD, a stablecoin this year.

While the government’s current view is that GST will only apply to the margin or service fees and not to the entire value chain or the gross value of the asset, issues such as the tax treatment of certain transactions such as mining or “airdropped crypto-tokens” are being examined.

On the direct tax side, which deals with income or capital gains from crypto transactions, the center imposed a 30% tax on income from crypto assets effective April 1. It also introduced a tax of 1% deducted at source (TDS) on payment of virtual assets exceeding 10,000 during a year and taxation of such gifts in the hands of recipients from 1 July.

Pratik Jain, a partner at Price Waterhouse & Co. LLP, said cryptos are treated as financial or securities transactions in many countries and therefore exempt from GST. “Given the complex nature of transactions and varying practices, it would be important for the government to engage with the industry and have detailed deliberations,” Jain said. He added that it may also require legislative changes. “Some clarification or guidance on past transactions will also be necessary to avoid unjustified disputes.”

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MS Mani, a partner at Deloitte India, said the absence of a clear GST framework that includes classification, rates and input tax credit has led to more confusion among exchanges, buyers and sellers. “Establishing a clear framework will help all crypto market players to adopt a uniform treatment of crypto transactions,” he said.

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