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An indirect tax may be applied to cryptocurrencies soon, as the government begins work on a comprehensive system for crypto assets. A recent report said that putting in place these rules would prevent any loss of revenue to the treasury due to the lack of clarity about the true nature of these assets. The report also stated that cryptocurrencies could attract GST rates between 18 and 28 percent, citing people familiar with the development.
According to the Mint report, the Ministry of Finance aims to “identify the characteristics of cryptocurrencies, their use, and how they fit into the existing legal framework.” The two sources said they have requested their release once the legal nature is determined, the appropriate GST rate will be determined.
“We are still discussing the possibility of applying GST in the case of crypto assets… at the moment, it is being imposed on services… so we need to know if crypto assets are declared as a good or a service. We can get a special price for that. It’s not necessarily 18 percent or 28 percent. Maybe somewhere in between. “We’ve had some discussions about it and we’ll come to a decision soon,” one of them told the newspaper.
Goods and Services Tax on Cryptocurrencies: What Happens to the Existing Tax System?
Currently, the government imposes a 30 percent income tax on capital gains made through virtual digital assets and cryptocurrencies, while also charging 1 percent in tax refunds during their purchase. If GST is levied on cryptocurrencies, this means that the government will impose an indirect tax on this asset, which is different from income tax and payable taxes that fall under the category of direct taxes.
“The only current tax regime applicable to cryptocurrencies is a direct tax or income tax. The current tax regime of a 30 percent direct tax levied on “income from crypto assets” is part of our individual direct income. Goods and Services Tax (GST) is a tax An indirect that is imposed on the sale or purchase of goods and services and is paid by the individual only as the consumer.Sandeep Bajaj, Managing Partner at PSL Advocates & Solicitors, explained that even if crypto is placed under GST supervision, the current direct tax system will continue .
“The current tax system is expected to be changed to accommodate taxes on cryptocurrencies, especially with the possibility of introducing a tax rate different from the existing slabs. However, further changes depend entirely on how the government handles crypto-related transactions,” Nikhil noted. Pharma, Managing Partner of Miglani Varma & Co.
Ankit Jain, Partner at Ved Jain & Associates added, “Until the crypto-related rules are finalized, the implementation of GST has been unofficially suspended.”
What happens to crypto transactions with the introduction of the GST system?
Until the government comes up with new tax rules for cryptocurrency, there will be uncertainty about how to handle cryptocurrency transactions in the future. According to Aditya Chopra, Managing Partner of Victoriam Legal, “Under the GST Act, ‘goods’ means among others every type of movable property other than money and securities. Furthermore, ‘money’ means legal tender or a recognized foreign currency. By the Reserve Bank of India, therefore, digital assets are not classified as “money” under the GST. Also, digital assets do not fall within the meaning of “security” defined under the GST Act.”
“If (GST) is charged on the full or total value, the cryptocurrency will be considered a ‘good’ and GST, at the specified rate, will be levied on the price of that cryptocurrency. Bajaj noted that if it was charged for a service fee, any Service fee or transaction fee for cryptocurrency exchange will be subject to the specific GST rate.
How will this affect cryptocurrency trading in India?
Since the introduction of the income tax rule and subsequent withholding tax provisions, cryptocurrency trading in India It took a heavy hit, as the major exchanges reported lower trading volumes.
“While the imposition of a direct tax on Crypto has already dampened investor interest, the imposition of a Goods and Services Tax (GST) will also affect the same. On the other hand, the decision to tax Crypto is bound to allay investor fears as a ban Tam on the country’s cryptocurrency,” Bajaj said.
Chopra said that trading volumes across the country would drop if such a system were to be implemented. Trading volumes across the markets will decrease and traders will turn towards international exchanges, which are not within the purview of the Indian government. Also, customers may look to transfer their cryptocurrency from exchanges to private wallets. It can also lead to a direct link between decentralized exchanges and customers for business activities.
Cryptocurrency trading is also expected to become complicated, as exchanges have to keep proper records of their clients so that they can comply with them in real time.
“With the introduction of the GST system, cryptocurrency trading will become very complicated. The law will provide for the type of traders who are required to charge GST and those who do not. Moreover, there may be categories of traders who are allowed to credit the input tax from the GST. Goods and services paid when buying cryptocurrency and those who will not be allowed to do so
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