GST

GST on Cryptocurrency

The Indian market is reeling under the anxiousness about the future of cryptocurrency in India but looking at the report taken out by National Association of Software and Services Companies (NASSCOM), the future of crypto-tech industry seems promising since the industry has been found to have reached the height of 74 Million USDs in the Financial Year 2021. The signs of growth of Crypto-tech industry are astonishing right from small contract cryptos to decentralised networks. With promising future, certain questions are also raised around the legality of the cryptocurrency and applicability of GST on cryptocurrency.

There have been instances of siphoning of funds by the cryptocurrency exchanges in India and since then all the other cryptocurrency exchanges have come under the scrutiny of the enforcement agencies. Before understanding the implications of GST on Cryptocurrency, we must first understand the stance of the lawmakers on the legality of cryptocurrency.

The late Finance minister of India Shri Arun Jaitley clearly stated out the stance of the government when he declared on the floor of Parliament that the government of India does not recognise cryptocurrencies as legal tender and will take all the measures to eliminate this system of cryptocurrencies in financing of illegal activities. However, later in 2018 lifted the ban imposed on cryptocurrencies.

Thereafter certain suggestions have poured from various government departments on of whom suggest that cryptocurrency transactions should be taxed at the rate of 18 percent which can generate revenue upto Rupees 7200 crores.

Having said that it has become imperative to understand the applicability of GST on cryptocurrency.

Possible Implications of GST on Cryptocurrency  

There have been suggestions pouring from various sections of the society to tax the transactions made from cryptocurrency under GST. For the applicability of GST on cryptocurrency, it must be established whether the cryptocurrency lies within the category of goods or services.

The definition of goods under GST does not include money and securities within the meaning of goods. The RBI too does not recognise cryptocurrency as a legal currency. Further, the CGST Act also defines securities in relation to Securities Contracts (Regulations) Act, 1956 where too the cryptocurrencies do not find their place. Therefore, under CGST Act^[1], cryptocurrencies do not come within the scope of either money or securities.

Given the fact that GST on cryptocurrencies do not find its place within the meaning of the GST Act, the government would have to make amendments within the Act itself to include the Cryptocurrencies to apply GST on it.

Global practices on GST on Cryptocurrency

Singaporean law on GST on cryptocurrencies

The Singaporean law has defined the under their cryptocurrencies as digital payment tokens having characteristics such as fungibility, ability to be represented as a unit, can be traded, transferred, stored electronically. Further, it must be accepted as a medium of exchange by the public without any restrictions on being used as a consideration among other conditions.

The Singaporean law does not recognise the act of supply of goods or services by way of digital payment token as an event of ‘supply’ to be taxed under GST law. Similarly, supply of digital payment tokens in exchange for any fiat currency shall be not be treated as an event of supply and hence exempt from GST.

The services provided by the miners and where the transacting party is not identifiable, then it is Exempt from GST.

However, in the following events would be treated as ‘supply’ and taxable under GST:

1. Services provided by the miners to a known or identifiable party for a consideration.
2. The services offered by intermediaries and if some commission is charged on the services provided from their platform.

Similar approach has been adopted by tax jurisdictions of most of the countries in keeping the exchanges made thorough use of digital currencies outside the scope of taxable event and sale of goods and services through digital currencies as a taxable event.

UK law on GST on cryptocurrency

UK law on GST on cryptocurrency also exempts exchange in virtual currency from the scope of VAT but any goods and services that are purchased using cryptocurrencies are liable to be charged under VAT. Similarly, the activity of mining of crypto currency has also been kept outside the scope of VAT for the simple reason that the mining is not considered as an activity such that it attracts VAT because no connection exists between services that are provided and the consideration provided for it along with lack of a customer to avail the mining services.

Norwegian law on GST on cryptocurrency

Similar view has been adopted by the tax authorities in Norway where cryptocurrency is used as a mode of making payments and also for the purpose of exchange of cryptocurrencies have been kept outside the ambit of VAT. Mining of cryptocurrencies has also been exempted from VAT except in the case where a person is selling computing power to another facilitating the process of mining.

Swiss law on GST on cryptocurrency

The law of Switzerland also keeps the transactions made using cryptocurrencies outside the scope of VAT where the cryptocurrencies are being exchanged with other cryptocurrency and fiat money. But, the transactions made for exchanging other goods and services are subject to the application of VAT. These are not considered a barter transaction.

Australian law on GST on cryptocurrency

The Australian law treats cryptocurrencies as exempted from GST as financial services.  

Columbian law on GST on cryptocurrency

The Columbian law only charges intermediation fee from sales under VAT. Other than that, the cryptocurrencies are considered as personal property of the individual which is not subjected to VAT.

South African law on GST on cryptocurrency

The South African law considers cryptocurrencies part of crypto-assets which are included within the financial services exemption. This makes the acts of issuing, acquiring, collecting, buying, selling and transferring the ownership of cryptocurrencies exempted from VAT.

Transition from Cryptocurrency to NFTs

It must be noted that the world is moving ahead from cryptocurrency to Non-Fungible Tokens (NFTs) which represent a different class of digital asset. As the name suggests they are not fungible i.e. they cannot be exchanged with any other object. These are basically in the form of digital texts, images, videos or other type of content which can be stored in the network of Blockchain network. Currently, no guidelines are available about the taxability of NFTs both under Income tax and GST. However, taking into account the nature of the NFTs, the NFTs can be classified under the category of services and the creator can be taxed at the rate of 18%. The government has still not given any clarification about the nature of NFTs, therefore nothing can be predicted in this regards.

Conclusion

Having discussed the nature of classification of cryptocurrency across multiple tax jurisdictions, it is found that the cryptocurrencies are not subject to GST where cryptocurrencies have been seen as a mode of payment and not as a barter trade. From the perspective of Income tax, there has not been any clarification to tax cryptocurrencies under Income tax. Since the world treats gains made from cryptocurrencies as capital gains, it is expected that the government is likely to put gains made from cryptocurrencies either under the head of capital gains or income form business and profession depending upon the nature of the business. With the postponement of the Cryptocurrency Bill this winter session, it is expected that the government will come up with disclosure requirements such as KYC in the upcoming budget session. To sum up, it is the need of the hour that the government sheds some clarity with respect to the nature and applicability of GST on cryptocurrency.

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