The government may not widen the coverage of the goods and services tax (GST) soon to more crypto activities as the industry is struggling after it imposed a 30% income tax on crypto gains from the current fiscal year amid a global meltdown of such assets.

Currently, an 18% GST is levied only on services provided by crypto exchanges, which currently accounts for the bulk of crypto-related activities in India. Besides exchange services, the crypto ecosystem involves various other activities, including mining, wallet services, payment processing and the barter system. Crypto assets refer to the algorithm-based decentralised convertible virtual assets protected by cryptography.

The Central Board of Indirect Taxes and Customs (CBIC) and the GST Council committees are seized of the issues such as what is the nature of the transactions/business, how they happen, which entities are involved, whether is it always consumer-to-consumer or business-to-consumer, is there a system of registration and could there be onshore and offshore transactions. Also, it needs to clear whether certain transactions are goods or services.

Also Read: GST dept steps up anti-evasion drive

“While these studies are going on, for a deeper understanding of the crypto ecosystem, this is not the right time to cover more activities under GST as the industry says it has been hit hard by the income tax,” a senior official said.

From 2022-23, the government mandated 30% income tax on any income from the transfer of virtual digital assets (VDAs), with no deduction and set off of losses, which might adversely affect the sector. The government has also imposed a 1% tax deducted at source (TDS) on all VDA transactions.

Analysts are of the view that the government, however, should come out with some clarification on GST on exchange services. GST should be levied only on the fees levied by the platform/ exchange and not on the transaction value reflecting the value of the underlying crypto asset, analysts reckon.
Currently, there are litigations due to different interpretations by GST formations whether the 18% GST should be levied on the commission or fees charged by the crypto exchanges or on the entire value of VDAs as cryptocurrencies are not legally treated as the same legal tender money.

“There are significant classification and valuation aspects on crypto transactions which require clarification, additionally there is also an alignment required on their treatment with international practices. In the present situation, these clarifications would go a long way in bringing back more investors, who may be concerned about the lack of tax clarity, back into the market,” Deloitte India partner MS Mani said.

Despite the taxation of crypto assets, the cryptocurrency sector lacks legal sanctity and is unregulated in India. The government is in the process of preparing a legal framework for the sector. RBI has mentioned that the value of cryptocurrencies rests solely on the speculations and expectations of high returns that are not well anchored, so it will have a destabilising effect on the monetary and fiscal stability of a country.

Cryptocurrency markets the world over have lost more than $2 trillion in value over the past year, reflecting their high price volatility. Even though the Indian cryptocurrency market is relatively small, Indian investors have also lost money in the recent meltdown. According to a report by crypto exchange KuCoin, the Indian cryptocurrency market is expected to reach $241 million by 2030.