Update: Recent Developments Regarding Crypto-Asset Taxation in India – Technology



India: Update: Recent developments regarding the taxation of crypto-assets in India

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With the growing adoption of crypto-assets in India and the rapid developments in the crypto space, the government has introduced a separate scheme for levying income tax on Virtual Digital Assets (VDAs) in the 2022 budget proposals. (VDA Proposals Budget).

The VDA budget proposals: (i) provide for a 30% tax on income from the transfer of VDAs; (ii) introduce a tax at the beneficiary level in the event of an ADV donation for no or insufficient consideration and (iii) also introduce a new withholding tax obligation (TDS) (effective July 1, 2022) for persons liable for any consideration to residents for the transfer of VDAs. Our ergonomicson the 2022 budget, covering the budget VDA proposals are accessible here.

After the announcement of the VDA budget proposals, some interpretation issues have arisen and lately some other developments have also arisen regarding the taxation of VDAs.

Below is a summary of these developments that have taken place in the area of ​​income tax:

  • Inter se compensation of unauthorized loss: When introducing the VDA budget proposals, there remained ambiguity as to whether the loss resulting from the transfer of one VDA (e.g. Bitcoin) can be compensated by the income resulting from the transfer of another VDA (e.g. example Ethereum). In this regard, changes have been made to the VDA’s budget proposals to clarify that such inter se compensation of losses will not be permitted.

  • Crypto-asset mining costs cannot be treated as “acquisition costs”: The Ministry of Finance, in response to a question posed to it during the Lok Sabha session of March 21, 2022, stated that the “infrastructure costs” incurred in the mining of crypto-assets do not will not be treated as “acquisition costs” as these costs will be of the nature of capital expenditure and therefore will not be allowed as a deduction.

  • Legal petition challenging a TDS proceeding initiated against a crypto platform: Apparently, the Karnataka High Court granted a writ petition, in which the petitioner, a crypto platform, challenged the TDS proceeding brought against it by the Income Tax Department. It was reported that the Income Tax Department found that:

    • The petitioner executes orders to sell or buy cryptocurrencies on another third-party platform for his clients and therefore the petitioner is a facilitator, i.e. an e-commerce operator, to the purposes of Section 194-O (i.e. 1% TDS on electronic trading platforms) of the Income Tax (Computers) Act 1961.

    • Cryptocurrencies are “goods” and the provisions of Section 194Q (i.e. 0.1% TDS on purchase of goods) and Section 206C(1H) (i.e. say 0.1% TCS on the sale of goods) of the IT law are applicable.

From now on, with the promulgation of the 2022 finance law, the new tax regime for VDAs has become applicable. Our ergonomics retracing the changes made to the 2022 finance bill during its passage through Parliament is accessible here.

Developments in the GST space

GST investigations were conducted against various crypto exchanges in India in late 2021-early 2022 and according to news reports, past taxes equivalent to approximately US$12 million were recovered from them, mostly vis-à-vis commission income they have earned.

Given such a spotlight on crypto-assets so close to the 2022 budget, there was a lot of expectation for clarifications to emerge. vis à vis The implications of GST on various transactions involving crypto-assets, more so given the VDA budget proposals under income tax laws. However, such clarity in the context of the GST still eludes us, although it appears that the Central Board of Excise and Customs (CBIC) is in the process of finalizing its recommendations in this context for consideration by the GST Board (The GST Board is the constitutional body responsible for all GST policy decisions). If the news reports are to be believed, the delay in this regard may be due to the fact that there are many different schools of thought vis à vis GST and crypto-assets within the CBIC.

Nevertheless, it is pertinent to note that the following points are actively considered by the CBIC vis à vis GST and crypto-assets, according to dispatches:

  • Should crypto-assets be taxed as “goods” or “services” – There is a prominent school of thought that seeks to levy GST on the full value of a crypto-asset, when it is transferred. What is assessed is how best to achieve this goal – whether to classify the transfer/sale of crypto-assets as “sale/provision of goods” (albeit intangible) or “provision of services “. Overall, the two previous ones exist.

  • What should be the applicable GST rate vis à viscrypto-assets – Although the conundrum of “goods or services” is not yet solved, the value of the transaction in rupees or the equivalent denomination in a foreign currency can be used to determine the taxable base for the levy of GST on a transaction involving crypto-assets.

  • However, with respect to the applicable GST rate, the following options would be considered:

    • Apply the standard GST rate of 18% in the residue category;

    • There is a school of thought that believes that transactions in crypto-assets should be treated on an equal footing with things like lottery, casinos, betting, gambling and horse racing and should therefore be subject to GST at 28%; and

    • Another school of thought acknowledges the potential negative effect of high tax rates on the crypto ecosystem and proposes a highly concessional GST rate in the range of 0.1% to 1% (for context, such rates are currently available for categories such as: (i) export supplies in certain scenarios; and (ii) affordable housing under construction).


  • Taxation of services associated with crypto-assets, including services by exchanges – Various services such as mining and related services such as wallet, sale and purchase facilitation, transfer, etc. are also considered to be taxed at the GST rate of 18%.

  • Specifically, exchanges facilitating transactions in crypto-assets are the subject of particular attention. In this context, the GST authorities would have noted the following in order to reach a conclusion:

    • Only a few exchanges in India actually have crypto-assets on their finances, available for purchase/sale by traders/investors. In most cases, exchanges/holding companies outside India hold the crypto-assets which are made available to Indian exchanges in various ways.

    • While the exchange may be located in India, the buyer or seller can often be based outside India.


  • In this context, specific changes are reportedly being assessed to the “place of supply” provisions under the GST Acts to clearly provide for the levying of GST on some of the cross-border transactions.

  • Can crypto-assets, at least some of them, qualify as “actionable claims” – Transactions in “actionable claims” (with some exceptions) are excluded from the levy of the GST. The GST Acts borrow the definition of “actionable claims” from the Conveyancing Act 1882 and the same includes claims on any unsecured debt or beneficial interest in movable property which does not is not in possession.

  • The government is said to be assessing the possibility that at least some of the crypto-assets/transactions qualify as actionable claims, in which case they will be out of the GST net and therefore GST will not be levied only on the components of the service and not on the whole. value of crypto-assets.

COMMENTS

On the income tax front, although not allowing inter se VDA loss offsetting seems to discourage people from trading VDAs, it is helpful that the government itself has provided this clarification beforehand and dispelled any doubts in this regard.

Given the huge volume of crypto-asset transactions in India, it is hoped that a sound GST tax regime will soon be introduced covering the entire spectrum of crypto-asset transactions – this will help investors /traders to achieve full clarity vis à vis direct and indirect tax implications.

The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected]

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