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  • Rav P. Singh

INDIA’S ‘CRYPTO TAX’ – II



Since the Finance Minister of India’s Budget Speech of 2022 which announced ‘Crypto tax’, regulatory regime for cryptocurrencies seems to be no more certain than it was before. On the one hand, some cryptocurrency exchanges have reported an increase in transactions after the announcement of crypto tax. Investors were perhaps encouraged by a modicum of certainty induced by the crypto tax. Though if investments increased due to the mistaken belief that taxation equals legality, investors may be under the wrong impression. On the other hand, Deputy Governor of RBI’s stance suggests that RBI isn’t too keen to legalise cryptocurrency. Equally, Rajya Sabha MP Sushil Kumar Modi has urged the Union of India to levy GST on cryptocurrency. Which brings me to the subject of this post where I elaborate on my tentative views about the interface of cryptocurrency and GST.


Purchase through Cryptocurrency Exchanges


Purchasing cryptocurrency through exchanges presents a comparatively straightforward case for levy of GST. A helpful analogy is purchase of securities, where GST is levied on the brokerage fee charged for facilitating the purchase and sale of securities. Cryptocurrency exchanges could be subjected to a similar obligation and media reports suggest that they are already collecting GST from investors but only on their fee and not the entire value of investment.


If GST is levied only on brokerage fee collected by cryptocurrency exchanges, then it is the service provided by the exchange that is being sought to tax. On the other hand, if entire value of investment must be taxed, then it can only be justified by treating cryptocurrency as a good or actionable claim and treating its sale as a supply. The latter is a tougher question to wrestle with and I unpack it in the following sections.


Converting Fiat Currency into Cryptocurrency


If a person merely converts fiat currency into cryptocurrency through an intermediary, could such a transaction be subject to GST? While this transaction is not dissimilar to investing in cryptocurrency, the person’s intent is not to invest in cryptocurrency but to make certain purchases that are more beneficial or can be completed only via cryptocurrency. This is comparable to purchase of foreign currency for travel purposes. Sec 2(102), CGST Act, 2017 defines services to include activities 'relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;'.


Reading the above provision with Sec 7, CGST Act, 2017, which defines supply, it is easy to deduce that conversion of Indian currency to foreign currency would be subject to GST. But, to levy GST on conversion of fiat currency to cryptocurrency would, in my view, involve arguing that it is an activity relating to the use of money or its conversion from one form to another. While a literal reading of the definition may allow us to make this argument, I doubt that it reflects true intent of the provision. Further, would the RBI or Ministry of Finance be keen to treat cryptocurrency akin to a currency or money? It could be one of the implications of including the above mentioned activity within the scope of Sec 2(102).


GST on Barters and Purchases


The equally knottier issue is that of using cryptocurrency to purchase fiat currency or buy goods or pay for services. Exchange of cryptocurrency for fiat currency would run into similar issues as those of conversion fiat currency into cryptocurrency. The levy of GST on purchase of goods through cryptocurrency would be no different. Whether to tax such transactions would depend on the Revenue Department’s assessment of the volume and value of cryptocurrency changing hands through this route.


GST on Mining


GST on mining of cryptocurrency is even more challenging. If mining is viewed as an activity that results in a reward to the miner, then it is merely acquisition of a virtual digital asset and could attract GST at the time of acquisition. But identity of the seller or supplier may be difficult to ascertain. Further, if mining is viewed as an activity that validates the transaction on a blockchain then it can be classified as a service. But who will be the service recipient in that case? Anonymous? To address the issue of anonymity, even if GST is levied on a reverse charge basis, it presents the challenge of whether to classify such transactions are inter-State or intra-State? Latter is an issue not specific to mining and could arise in most transactions relating to cryptocurrencies.


Core Challenge


In my view, the core challenge in subjecting cryptocurrency to GST is not the difficulty of arriving at a determination as to whether it is a good or actionable claim or whether facilitating its transactions amounts to a service. Given the inclusive definition of goods under Sec 2(52), CGST Act, 2017 and Art 366(12), I’ve little doubt that cryptocurrency can be suitably accommodated under the aegis of GST.

The daunting challenge is how to ensure that all the aspects are covered. Cryptocurrency can be a good or an actionable claim and akin to a currency depending on the context and nature of transaction. The indirect tax provisions will need to be customized for each transaction. A broad-brush approach – like one adopted under the IT Act, 1961 – may only add to the confusion and uncertainty about GST consequences of cryptocurrency related transactions.


Further, under GST, it is not simply a matter of levying a tax, one must consider related issues of registration requirements, ITC and other compliance issues.


Conclusion


Through my current post and the previous one, I’ve tried to examine basic contours of cryptocurrency taxation in India. A simple summary of the current legal position is that direct tax consequences do have a tentative answer, but GST interface is currently in the realm of speculation. From Financial Year 2022-23 onwards, there will be a 30% tax on cryptocurrency gains under IT Act, 1961 but details on valuations and other related issues are awaited. Clarity on GST consequences of cryptocurrency transactions in India – if any - may involve a longer wait.

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