It seems that the Modi government's distrust of cryptocurrencies is surpassed only by its keenness to tax that gravy boat. Last April, the RBI had directed banks to wrap up all dealings with virtual currency players within three months. But before that, in February, the Income Tax Department had issued about one lakh notices to people who had invested in cryptocurrencies like Bitcoin without declaring it in their income tax returns - just days after Finance Minister Arun Jaitley announced that the government did not consider cryptocurrencies as legal tender. And now, the buzz is that the government may bring cryptocurrency trading within the ambit of the Goods and Services Tax (GST).
Sources told BloombergQuint that the government may levy an 18 per cent GST after classifying cryptocurrencies as intangible goods on par with software, and that the proposal will be tabled before the GST Council after the Central Board of Indirect Taxes and Customs evaluates it.
The decision to tax virtual currencies makes sense when you consider the fact that the RBI's clampdown has not really worked out and, in fact, is being challenged in court. A month after the apex bank's move, trading volumes had surged dramatically alongside a sharp rally in prices. Average daily volumes were as high as $75 million - close to levels before the rule changes - Coindelta, the Pune-based cryptocurrency exchange, told Reuters. The exchanges were reportedly seeing new investors come in while the existing ones were regaining interest.
That apart, banning crypto trade would only push investors and sellers to seek out alternate ways to transact like crypto-to-crypto trading platforms or - the government's worst nightmare - using cash.
Under the new proposal to slap GST on this trade, purchase or sale of cryptocurrencies would be considered as supply of goods, and those facilitating transactions - say transfer, storage, accounting, supply, et al - would be treated as services. Hence, if it is passed, everything from cryptocurrency mining to wallets storing keys and the commission earned by the exchanges will be taxed. Citing sources, the report said that GST would be collected from miners on transaction fees or reward, and if the latter's value is over Rs 20 lakh, individual miners will have to register under GST. Wallet service providers and cryptocurrency exchanges will also have to register.
Abhishek Jain, indirect tax partner at EY India, told BloombergQuint that treating cryptocurrencies as goods and services may make taxation simpler since the government will have to just issue a circular that they were always liable to GST. But to tax them as a currency or a security would require a change in law.
The proposal reportedly also added that should both buyers and sellers be 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 would be the place of supply but in case of a sale to non-registered persons, the location of the supplier would be considered. Furthermore, transactions beyond the Indian territory would be liable for integrated GST - it would be considered as import or export of goods and IGST would be levied on cross-border supplies.
Significantly, the government may even consider levying GST on crypto-trading retrospectively from July 1, 2017, when the new tax regime rolled out. If this indeed comes to pass, the government coffers are in for a windfall. In India, 2-3 million investors trade between Rs 100 to 200 crore worth of crypto-currencies a day. In the past 10 months since GST was implemented, virtual currencies reportedly managed bumper business of around Rs 200 crore per month. At 18 per cent GST that works out to nearly Rs 360 crore as revenue for the government.
Interestingly, these moves to tax cryptocurrencies come even as India is yet to take a firm call on its legal status. Earlier this month, the Special Investigation Team (SIT) on black money asked probe agencies to curb the use of cryptocurrencies as it reviewed their links to shady offshore transactions. For instance, as pointed out by the Narcotics Control Bureau, about four cryptocurrency-fuelled drugs smuggling transactions had been unearthed in the country in the past two years. The government's fear of cryptocurrencies being used to fund such illegal activities is what had led to its clampdown. But the Department of Economic Affairs reportedly does not want to ban cryptocurrencies, only regulate them.
In the bargain, despite holding an estimated 10 per cent of the virtual currencies in the world, the country still lacks a legal framework to govern the same. The government had previously set up a committee led by department of economic affairs secretary Subhash Chandra Garg to come out with recommendations by March-end. But there has been no update so far but the decision to implement GST will depend on this report. Of course, the government will then have to look at other laws to control the more nefarious aspects of this trade.