GST

Government Aims to Impose 18% GST on Bitcoin Trading

If news reports are to be believed, the Central Economic Intelligence Bureau is proposing 18% GST on bitcoin transactions. As per reports, a suggestion has been made to tax bitcoin under intangible assets and levy GST on all transactions. This move is expected to generate 7200 crore rupees annually. This article describes the GST on Bitcoin Trading.

What is Bitcoin?

It is a digital currency which is not backed by any country’s central bank or government. It can be traded for goods and services with vendors who take it as a method of payment. Bitcoin offers the promise of less transaction fees than the traditional online payment mechanism, and it is operated by a decentralized authority. 

Bitcoin Trading in India

The cryptocurrency market has evolved greatly in India as CoinDCX, the largest cryptocurrency exchange in India, registered a massive rise in the volume and active users. India, with a large economy, is one of the fastest growing economies around the world. Despite the potential it possesses, India has faced several regulatory challenges in terms of cryptocurrency.

The Reserve bank imposed a ban on all banking transactions related to Bitcoin and other cryptocurrencies, but only recently the Supreme Court of India lifted the ban on cryptocurrency exchanges. The apex court stated that banning is not the solution, but RBI should take steps to regulate virtual currencies until the time there is proper legislation.

So is it legal to buy bitcoins in India?

When the Supreme Court had overturned the ban, this meant that the companies could do business more easily in this space, while holding bitcoin trading was never illegal.

One of the leading online tax services also stated that there aren’t any rules or regulations in place for resolving disputes that can come up while dealing with Cryptocurrency. It sort of amplifies the risk while dealing with cryptocurrency in India. Having said that, it is legal to buy bitcoin in India. 

Bitcoin Trading in India: GST angle

At a time when the regulation of virtual currencies is still being argued and the status of virtual currencies still in question, as to whether it is a legal tender or commodity or property or capital asset to be determined, it is surprising o see a press report indicating a possible GST on Bitcoin trading in the future.

Taxing Virtual Currencies

In a country where virtual currencies are not considered legal tender, then what is their categorization from the perspective of accounting and taxation? Are they to be considered capital assets, or should there be a separate charge for taxing fluctuations in these types of currencies?

If virtual currency is not considered a legal tender, then its identification from a tax perspective is crucial. Should they be deemed as capital assets or property? Should there be a separate head of income for taxation of these types of currencies provided that they tend to fluctuate in value? As some would know, the value of cryptocurrency is unstable. On some occasions, the Bitcoin value has swung 25% in a day.

What should India do?

The commonality in this new fabric of virtual currency is that it isn’t treated as money, but the potential for appreciation and the ability to be used to fulfill transactions is recognised, and once it’s recognised, the basic direct and indirect principles that govern assets or inventory or personal asset are applied, and the tax treatment shall be structured accordingly.

India is required to regulate virtual currency by bringing in strict controls as part of the regulations. This is because the currency could be used to further illegal objectives. Cases of Tax evasion have plagued India for long and efforts are made to discourage cash transactions and promote digital transactions.  Therefore leaving virtual currencies out of the equation can seriously impact.

The technical challenges in the context of Bitcoin trading or cryptocurrency, like massive power consumption, could cause India to consider banning these currencies. However, technological solutions can find its way, and in the long run, keeping a strict vigil through regulations can be the way forward. 

With the rise in digital transactions, it could be a possibility in the future where we see virtual currencies attaining legal status. As the regulations are still to be brought about and the status of these currencies yet to be determined, an attempt to impose GST can potentially complicate matters.

Bitcoin Trading in India: So, what are the taxes that one should be concerned about?

There is not much clarity with regards to tax front on Bitcoin investment in India. As per CoinDesk, one of the digital currency news sites, Indian investors may soon be required to pay taxes on returns which they earned from investing in Bitcoin.

The income for selling Bitcoin is taxed at 30% on cryptocurrency gains for short term investments and around 20% for long term investments. However, it is to be taken note that if you don’t sell the Bitcoin, then you don’t need to pay money just because the value went up.

18% GST on Bitcoin trading can kill the local industry: Local Crypto exchanges

As per estimations of the tax department, the Indian crypto exchanges handle around 40 billion rupees in Bitcoin traders and a tax of 18% on them can generate taxation revenue of close to 1 billion USD.

After the Supreme Court ruling lifting the banking services ban to crypto currencies, businesses of Indian exchanges have done alright. As stated above, major exchanges like CoinDesk have reported massive gains.

However, Local crypto exchanges are apprehensive with the taxation percentage. B21 founder Nitin Aggarwal explained that taxing based on transaction value and that 18% will mean that if crypto doesn’t appreciate 18%, one can’t make a profit.

Cryptocurrency exchanges fear that transactions will move out to international exchanges or to P2P websites. Experts believe that taxation can be put in place once a regulatory framework governing cryptos are made.

Conclusion

As the reports of the Central Economic Intelligence Bureau^[1] proposing 18% GST on bitcoin trading came out, it has led to all sorts of confusions and speculations. However, it may be noted that Central Economic Intelligence Bureau is an economic intelligence agency, and even though this decision is approved by the finance ministry, it still would be required to make its way through the GST council.

Read our article:Supreme Court Lifts RBI Ban on Cryptocurrency Trading: Bitcoin Legal in India