GST on CryptoCurrency – subject matter of dispute from the taxability
Cryptocurrency is made up of two different words, “crypto” and “currency”. Hence, it can be said that cryptocurrencies are currencies that use the science of cryptography. This is because these currencies widely use encryption techniques. This means that encryption techniques are used for two main functions related to currencies viz. generating new currency as well as verifying the transfer of funds in a public ledger. Hence, cryptocurrencies are not like traditional money in the sense that they are just digital tokens.
Under the Income tax law in India cryptocurrency is classified as virtual digital asset.
Virtual digital asset has been defined through insertion of new clause (47A) in Section 2 of the Finance Act, which is as follows:
“It means:
(a) Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) Non-fungible Token (NFT) or any other token of similar nature, by whatever name called;
(c) Any other digital asset, as the Central Government may, by notification in the Official Gazette specify.”
In simple words, the virtual digital currency shall mean cryptocurrency, NFT or another virtual digital currency as notified by the Central Government. Further, just like other currency, these assets in the form of currency can be used to buy or procure any goods and services.
Virtual Digital Asset Taxability under income tax After 1st April, 2022
After the Union Budget, 2022, the Finance Minister announced that the income arising from the transfer of virtual digital asset shall be taxed at the rate of 30%. Thereby, a new section namely Section 115BBH(1) was inserted in the Income Tax Act.
Furthermore, post April 1, 2022, both short term and long term virtual digital currency will be taxed at flat 30%. This is applicable even if the income from digital asset is treated under the head income from business or profession or income from other sources.
The government is working on the classification of it as goods or services under the GST law, so that tax can be levied on the entire value of transactions. The tax department is scrutinizing whether these transactions involving exchanges could also attract additional GST. For GST to apply, there must be a supply of goods or services in India.
“Goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
“Money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;
“Private cryptocurrency can neither be termed ‘money’ nor be categorized as ‘securities’ for taxation. Because cryptocurrencies are not recognized in India, they do not fall under the definition of money. Similarly, the GST Act defines securities with a cross reference to the Securities Contracts (Regulations) Act, 1956, where cryptocurrencies do not have a place. As a result, by strict definition, cryptocurrencies are not money or securities.
The Goods and Services Tax (GST) law in India does not clearly state about the classification of cryptocurrency.
Various countries deal with cryptocurrencies differently, e.g. in the USA, Bitcoin is treated as an asset. At the same time, Singapore recognizes Bitcoin as a valid currency, and Japan treats it as a commodity.
Under the Singapore GST law, digital payment tokens are specifically defined.
A digital payment token refers to any cryptographically secured digital representation of value that is used or intended to be used as a medium of exchange.
Examples of digital payment tokens are Bitcoins, Ether, Litecoin, Dash, Monero, Ripple and Zcash.
Way forward for Taxability of Crypto Currency in India
If we consider crypto as money, it would be exempted from GST as a pure transaction in money does not attract GST. But if crypto currency is treated as goods, it would mean that the supply of crypto is a taxable supply and GST can be charged on the same.
There are major following three transactions involved in cryptocurrency.
- Services provided by Miners: It may primarily satisfy the service description. GST can be added to the price. Service To levy GST on the transaction, the recipient and supplier must be identified. The person who mines the Crypto gets the cryptocurrency as a reward in the mining process. The said cryptocurrency received as a reward from mining activity can be considered a taxable transaction under GST.
- Services provided by intermediaries: Commission, margin, and specific fees collected by Exchange on transaction may be considered as a service and accordingly will attract GST taxability.
- Goods or services availed by payment in digital token should not be under consideration for taxability if GST is levied on said goods or services.
- Trading in Cryptocurrency may be considered a taxable transaction and GST may be levied on the margin earned.
- The margin earned on the Exchange of cryptocurrency with one another may be considered a taxable transaction.
In terms of media reports :
- Treatment of Cryptocurrency `mining’ as a supply of service since it generates cryptocurrency and involves rewards and transaction fees.
- Taxing of `wallets’ storing keys. Wallet service providers should be registered under GST.
- Registration of Cryptocurrency exchanges under GST and levy of tax on their earnings.
- Trading in cryptocurrency to be taxed @18 percent.
- Buying and selling of cryptocurrencies to be considered as a supply of goods.
- Other related facilitating transactions, including supply, transfer, storage, accounting to be treated as services.
- Determination of value of cryptocurrency.
- Where both buyer and seller are in India, transactions to be treated as a supply of software and taxable at the buyer’s location.
- For transfer and sale, the place of supply to be the location of the registered person. However, where the sale is to a non-registered person, the supplier’s location is considered a place of supply.
- Integrated GST payable on transactions outside the taxable territory and considered as import or export of goods.
Multiple media sources reported recently that the GST council is considering a 28 per cent tax on cryptocurrency, like the present GST on online gaming, casinos, betting, and lottery. Contrary to several media reports, the GST council is not going to impose 28 per cent GST on crypto services.
Conclusion
The GST Council, the highest decision-making body on indirect taxes in India, during its next meeting is going to consider taxability of crypto currency in India.
Disclaimer: This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.
Published on: June 7, 2022