What does a GST probe against exchanges mean for crypto taxation?

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The dawn of the new year failed to bring with it any reg­u­la­to­ry clar­i­ty on cryp­tocur­ren­cies or how they can be taxed in India. And this has its con­se­quences. Last week, the Cen­tral Goods and Ser­vices Tax Mum­bai Zone said, it had detect­ed of Rs 40.5 crore on com­mis­sion earned by Indi­an cryp­to exchange WazirX. The Mum­bai-based cryp­to firm had to cough up Rs 49.2 crore, which includ­ed its GST dues plus inter­est. The con­tention was that WazirX wasn’t pay­ing GST on the com­mis­sions that it charged on trans­ac­tions through its plat­form. If the trans­ac­tion is in Indi­an rupees or cryp­tocur­ren­cies such as Bit­coin and Ether, WazirX charges a com­mis­sion of 0.2%. But if the trans­ac­tion is in WazirX’s own native util­i­ty called WRX, the exchange charges a com­mis­sion of 0.1%. The tax author­i­ties have claimed that WazirX was only pay­ing GST on the com­mis­sion it earned in INR, but not on the com­mis­sion it earned in its own WRX. The argu­ment seems to be that by facil­i­tat­ing peer-to-peer trans­ac­tions on its plat­form, WazirX is pro­vid­ing a ser­vice, which is tax­able at 18% GST. This is sim­i­lar to what com­mod­i­ty exchanges and oth­er inter­me­di­aries have to pay in India. After GST recov­ery from WazirX, the Direc­torate Gen­er­al of GST Intel­li­gence under the Min­istry of Finance has report­ed­ly launched probes into the com­mis­sion struc­ture of var­i­ous oth­er cryp­to exchanges, inves­ti­gat­ing whether there are more cas­es of Cryp­to exchanges, on their part, have claimed that the issue arose because of lack of reg­u­la­to­ry clar­i­ty on the treat­ment of as a cur­ren­cy, a com­mod­i­ty, a ser­vice, or some­thing else. If the WazirX inci­dent serves as prece­dent, then at least part of what cryp­to exchanges pro­vide can be cat­e­gorised as ser­vices and taxed accordingly. 

This could pro­vide some clar­i­ty to Indi­an cryp­to exchanges going for­ward. Indi­an cryp­to firms also await clar­i­ty on how to treat the income made through cryp­to invest­ments. While there is no clar­i­fi­ca­tion from the gov­ern­ment on that front either, indus­try play­ers have built a con­sen­sus. Users are advised that if they’ve made a small prof­it and cashed in before 36 months, then such gains from cryp­tocur­ren­cies will have to be list­ed under ‘oth­er income’ in the tax form, and be paid as per the tax brack­et applic­a­ble to them. If cryp­tos are held for more than 36 months, then gains should be clas­si­fied as ‘long-term cap­i­tal gains’ and will be sub­ject to tax at 20%, plus applic­a­ble sur­charge and cess. Indi­an cryp­to exchanges are also rou­tine­ly probed for vio­lat­ing the For­eign Exchange Man­age­ment Act, which per­mits cross-bor­der barter-only through autho­rised bank­ing chan­nels. In this con­text, cross-bor­der cryp­to trans­ac­tions being facil­i­tat­ed by Indi­an cryp­to firms are seen run­ning afoul of India’s FEMA rules. More clar­i­ty is expect­ed along these lines every year dur­ing the bud­get ses­sion. It remains to be seen if India’s long-await­ed Bill to reg­u­late cryp­tocur­ren­cies will see the light of day next month.

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