All you need to know about Crypto Under GST
Talk about cryptos in India and suddenly one gets to hear terms like gambling, tax evasion and so forth. Despite truly unleashing the power of cryptos and the technological change that blockchain networks brings along with it, crypto investors have remained on the edge owing to the sheer absence of government regulations that are required for strengthening and establishing the crypto ecosystem.
Further, over time, there has been a constant dilemma among investors about how the Goods & Service Tax (GST) will be made applicable to crypto-assets in India. However, India’s Finance Minister, Honourable Nirmala Sitharaman, delivered some key announcements in the 2022–23 finance budget about how GST will be applied to crypto in India and what percentage of income tax will be levied on crypto gains.
In this article we discuss the risks associated with cryptos, India’s current stand on how to tax crypto investments and crypto exchanges, and the future of crypto investors owing to taxation in India.
All about risks in Crypto assets
Cryptos are virtual coins that were developed for conducting peer-to-peer (P2P) payment transactions where there is no need for the intervention of physical banks. Such crypto coins are now traded on a range of crypto exchanges in India. The rationale behind developing a P2P system was to decentralise. However, the model of decentralisation inherently poses a series of challenges to the government institutions that often work on a centralised payment system model.
Fiat money printed by government institutions is usually backed by reserves of assets such as gold, bonds, etc. However, the majority of crypto coins are not backed by any concrete reserve of assets. They simply work on the dynamics of demand and supply by investors, traders, etc. Despite all the benefits that come from blockchain technology, the above points pose a serious challenge for the government. In order to regulate such asset classes that are risky but not dispensable, the government of India took some substantial steps aimed at regulating the whole Crypto ecosystem.
Indian GST Regulations On Crypto Investments
The journey of crypto has come a long way in India. What started off as a cautionary notice issued against trading in virtual currencies by the Reserve Bank of India (RBI) in 2013 was followed by a circular vide notification in 2018 for banning crypto trade in India and not allowing any banks facilitate virtual currencies. It was subsequently followed by the quashing of the RBI’s circular for banning crypto trade by the Honourable Supreme Court of India in 2020. The Honourable Supreme Court ruled that it is illegal for banks to stop dealing in crypto or not provide services.
In the winter session of the Parliament way back in November 2021, the government planned on introducing “the crypto and regulation of the official digital currency bill”. Recently, in the February 2022 Finance Bill, there were some key announcements which were made regarding cryptos.
Firstly, the government of India has plans to introduce a digital currency of its own using proprietary blockchain network technology. Secondly, key announcements were made to direct taxation on crypto investments, such as for example 30% income tax plus cess and surcharges on the gains made on crypto investments. It was further stipulated that while paying 30% income tax, no loss can be offset against the crypto coin. So, for example, if you have a profit of INR 1 lakh and you have a loss of INR 1 lakh, you will still have to cough up INR 30,000 on your total profit.
In addition to direct taxation, there is also a component of Tax Deducted at Source (TDS), which was supposed to be charged to the tune of 1% on any transfer of crypto investments. In the budget of 2022–23, 1% TDS was also proposed on payments for cryptos that are in excess of INR 10,000 in a year. TDS was supposed to be charged at a limit of INR 50,000 for individuals/HUF whose accounts need to be audited under the IT act. Finally, unlike tax-exempt gifts that are received in other asset classes, gifts given via crypto coins are liable to be taxed at the recipient’s end.
These were the direct tax implementations on crypto investment; let us now discuss indirect taxes such as the GST on crypto.
Currently, GST regulations on crypto investments are quite unambiguous. Some officials view cryptos as a lottery, gambling, etc., that usually come under the 28% GST tax slab. On the other hand, some GST officials have hinted that should GST be implemented on crypto, the rates would be applicable between the 0.1% and 1% range.
Also Read About: Crypto Tax In India & Its Impact
The Future Of Crypto In India In Terms Of GST
As if the imposition of 30% tax on gains from crypto trade was not enough, there is a new tax regime that is waiting in the way of crypto exchanges: the GST Council is likely to consider imposing 28 percent Goods and Services Tax on crypto assets, if various media reports are something to go by.
Accordingly, the GST Council has constituted a committee that would soon take up the proposal of imposing 28% GST on varied activities and services related to cryptos. The proposal is expected to be tabled before the GST Council in the arriving meeting.
Crypto activities that would be covered for the purpose of GST levy include sale and purchase of crypto tokens on various exchanges, holding these assets across centralised and decentralised wallets, as well as staking on different platforms.
It is being believed that the GST Council may examine all these activities before they arrive at a decision.
There have been several reports doing the rounds on the imposition of GST on crypto assets ever since the Government announced a flat 30% tax on income from cryptos and other virtual digital assets, besides a 1 % TDS on crypto transfers.
Currently, there is an 18% tax levy on services provided by various crypto exchanges.
In fact, the government is viewing crypto at par with lottery casinos, betting, gambling and horse racing. All of these attract 28% GST on the entire value plus 3% more in case of gold and crypto ventures too are expected to attract prohibitively high GST rates. The future of the industry seems grim at the backdrop of a punitive tax regime.
All such initiatives and regulations go to show that the government is slowly but steadily moving towards forming firmer regulations regarding cryptos. As investors, one need to be careful in selecting the right crypto exchange in India that complies with all the government regulations and is safe for making long or short-term investments. One such exchange is Zebpay, which is India’s oldest and most trusted crypto exchange.