In brief:
Reportedly, Indian tax authority may impose 18 percent Goods and Services Tax (GST) on the trading of cryptocurrencies from July 2018.

According to reports, Indian tax authority is considering imposing 18 percent Goods and Services Tax (GST) on the trading of cryptocurrencies. This brings a sigh of relief for cryptocurrency investors as for the past few months the Indian government repeatedly kept warning against digital currency investments, by calling them Ponzi schemes.

Although the legal status of cryptocurrencies in the country still remains unclear, the tax proposal is being considered by the Central Board of Indirect Taxes and Customs. After being finalized it will be presented before the GST Council.

Currently, like other software systems, the digital asset could be classified under “intangible goods”. Digital currencies are not outrightly banned, however in December 2017, the Indian government undertook a crackdown on the cryptocurrency market. Cryptocurrency exchanges and traders were put under scrutiny and tax notices were sent to more than 500,000 traders.

The industry suffered another jolt in April 2018 when the Reserve Bank of India issued a circular which directed financial institutions to stop providing all banking services to cryptocurrency exchanges within three months of the directive.

However, recognizing the need of taxing digital currencies, now the Income Tax department has considered addressing the issue. The crypto market is growing at a very rapid pace and if it is not taxed appropriately, the recovery would become very difficult in the future.

The case of considering digital assets as a currency is a difficult process since the government would then need to change the law. By treating cryptocurrencies as goods and services, the taxation becomes easier.

According to the sources, the government could levy the new tax regime as soon as July 1. However, officially no date has been announced.
The highlights of the proposal include:

  • Value of a cryptocurrency may be determined based on the transaction value in rupees or the equivalent of any freely convertible foreign currency.
  • Purchase or sale of cryptocurrencies to be considered as the supply of goods, and those facilitating transactions like supply, transfer, storage, accounting, among others, will be treated as services.
  • 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.
  • Transactions beyond the Indian Territory will be liable for integrated GST and would be considered an import or export of goods. IGST will be levied on cross-border supplies.
  • For transfer and sale, the location of the registered person will be the place of supply. However, for sale to non-registered persons, the location of the supplier would be considered as the place of supply.

Under the proposal, since cryptocurrency wallet providers and users supply and receive the virtual currency, they will also be subject to GST. Furthermore, cryptocurrency mining will be considered as a “supply of service,” and will be subject to tax in accordance with the GST laws.

Mining is a process which records cryptocurrency transactions on the blockchain and verifies, confirms, and maintains a cryptocurrency’s network. In return for verifying the transactions, the miners get incentivized in the form of unlocking new coins or tokens. Since mining generates cryptocurrency and involves rewards, it will be treated as a supply of service and will be taxed. The miner earning more than Rs.20 lakh in reward shall have to register as a business entity with the GST Council.

The proposal directs cryptocurrency exchanges to register under GST and pay tax on the commission earned. Moreover, service provided by foreign exchanges would be considered the import of a service and will be subject to IGST.

Noticeably, the cryptocurrency market is profitable for both users and governments likewise. It could have possibly lead to the collection of substantial amount of taxes for the government had it taken this decision early last year.

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