Bitcoin prices slipped over 7% in the last 24 hours, from $7900 down 7% to $7335.85 level on 24th May 2018, following reports India is mulling imposing a tax on cryptocurrencies in the form of the Goods and Services Tax (GST).
This sharp fall came after a Bloombergquint report, that India is weighing up whether to impose Goods and Service tax (GST) on cryptocurrency trades. Despite holding an estimated 10% of the virtual currencies in the world, India still lacks a legal framework to govern the same.
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This has again brought the cryptocurrencies in the limelight among Indian investors. Let us look into this latest news in detail.
Bitcoin/Cryptocurrencies Under GST?
The latest news from the world of cryptocurrency, is that the Indian government may bring cryptocurrency trading within the ambit of the Goods and Services Tax (GST).
This is ironic given that the Indian regulators have cleared their stance on the legality of Bitcoin and other cryptocurrencies in India in the past – latest being a circular from the Reserve Bank of India (RBI) on 6th April 2018.
According to Bloomberg, the Indian government may levy an 18% GST after classifying cryptocurrencies as intangible goods on par with software, and that the proposal will be tabled before the GST Council after the Central Board of Indirect Taxes and Customs evaluates it.
In India, around 2-3 million investors trade between ₹100 to₹200 crore worth of crypto-currencies a day. Since GST was implemented in July 2017, virtual currencies reportedly managed a bumper business of around ₹200 crore per month. At 18% GST that works out to nearly ₹360 crore as revenue for the government.
Expected Framework of GST on Cryptocurrencies
As per bloombergquint report, under the new proposal to impose GST on the trade of cryptocurrencies, following frameworks can be expected:
- Purchase or sale of cryptocurrencies would be considered as a supply of goods, and those facilitating transactions, like for example transfer, storage, accounting, supply etc, would be treated as services.Hence, if it is passed, everything from cryptocurrency mining to wallets storing keys and the commission earned by the exchanges will be taxed under GST regime.
- GST would be collected from miners on transaction fees or reward, and if the latter’s value is over ₹20 lakh, individual miners will have to register under GST. Wallet service providers and cryptocurrency exchanges will also have to register.
- Cryptocurrencies as goods and services may make taxation simpler since the government will have to just issue a circular that they were always liable to GST. But to tax them as a currency or a security would require a change in law.
- Should both buyers and sellers be in India, the transaction would be treated as a supply of software and the buyer’s location will be the place of supply.For transfer and sale, the location of the registered person would be the place of supply but in case of a sale to non-registered persons, the location of the supplier would be considered.
- Transactions beyond the Indian territory would be liable for integrated GST, as in it would be considered as import or export of goods and IGST would be levied on cross-border supplies.
- The government may even consider levying GST on crypto-trading retrospectively from July 1, 2017, when the new tax regime rolled out.
If this tax proposal is accepted, the retroactive aspect of it is the most likely to be challenged by traders and exchanges in the courts.
Indian cryptocurrency businesses have already had to turn to the courts in the matter of the ban on banks from dealing with them, a matter that is now being handled by the country’s supreme court.
Why Bringing Cryptocurrencies Under GST Makes Sense?
In recent months, India’s tax department has been cracking down on tax avoidance by cryptocurrencies traders. In February 2018, after surveys of exchanges found that $3.5 billion in cryptocurrency transactions may have been performed by citizens over the previous 17 months.
According to Coindesk, it has issued notices to around 100,000 traders and investors.
The decision to tax crptocurrencies makes sense when you consider the fact that:
- The RBI’s clampdown has not really worked and, in fact, is being challenged in court.Also, a month after the RBI’s move, trading volumes of cryptocurrencies had surged dramatically alongside a sharp rally in prices.
According to Coindelta, the Pune-based cryptocurrency exchange, “The average daily volumes were as high as $75 million – close to levels before the rule changes.
The exchanges were reportedly seeing new investors come in while the existing ones were regaining interest.”
- Banning trade of cryptocurrencies would only push investors and sellers to seek out alternate ways to transact like crypto-to-crypto trading platforms or using cash (current government’s nightmare).
- Back in September 2017, Japan recognized Bitcoin as a currency. Australia is following suit, and so is South Korea.Japan has brought digital currency exchanges under supervision by its market regulator, imposed net worth norms and KYC norms. It has also brought them under the purview of money-laundering laws.
At the same time, it allows Bitcoin to be used in transactions. South Korea and Australia are headed in the same direction. Chances are that other large economies will also impose similar controls.
- There have been multiple types of initial coin offerings (ICOs). One is that of a start-up doing an IPO, which raises subscriptions in Bitcoin. These range from normal business ideas to wild schemes or frauds.
The Indian government had previously set up a committee led by department of economic affairs secretary, Mr. Subhash Chandra Garg to come out with recommendations by March 2018-end.
But there has been no update so far but the decision to implement GST will depend on this report. Of course, the government will then have to look at other laws to control the more nefarious aspects of this trade.
India’s Past Stands on Cryptocurrencies
The Reserve Bank of India (RBI) on 6th April 2018 issued a new circular on cryptocurrencies. This the 4th time RBI has conveyed its stance on digital currencies.
According to this circular:
- Its regulated entities such as banks and non-banking financial companies (NBFCs) must have no links to firms or individuals dealing with or settling cryptocurrencies like bitcoin. The directive comes into effect immediately.
- For entities which are already providing such services, three months time has been given to unwind such activity
“In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling VCs (virtual currencies),” the RBI said. “Regulated entities which already provide such services shall exit the relationship within a specified time.”
Apart from this, in the past, RBI had issued three warnings starting December 2013 in this regard. In all of them, the central bank cautioned users, holders and traders of the risks involved in dealing with these digital currencies.
It also clarified that it had not given any licence or authorization to any entity or company to operate schemes or deals related to cryptocurrencies.
However, RBI has said that it recognizes the importance of Blockchain technology, or distributed ledger technology that lies beneath these digital currencies.
Besides RBI, view of other Indian regulators as follows:
- In May 2017 , the central government sought public views on future of bitcoins. Government’s official platform MyGov had asked, “Whether Virtual Currencies (VCs) should be banned, regulated or observed?” The comments could be posted before May 31. Nearly 4,000 submissions were made to the government’s queries.
- On the future of cryptocurrencies, finance minister Arun Jaitley on November 30, 2017, said that recommendations are being worked upon. “The government’s position is clear, we don’t recognise this as legal currency as of now,” Jaitley said when asked whether the government has taken any decision on crypto currency.
- Income Tax (I-T) department mulls taxing the gains made by bitcoin traders and investors as it conducted surveys, on December 13, of exchanges in Delhi, Mumbai, Pune, Bengaluru and Hyderabad.
- Indian Finance Minister Mr. Arun Jaitley in his last full budget 2018 before the general election, clear up the government’s intentions regarding Bitcoin. He announced to ban the use of cryptocurrencies for payments, kicking Bitcoin’s already-sliding value further down the slope. It started probing illegal exchanges in December 2017, and also established a panel to work out new policies.
Read: Is Bitcoin Legal in India in 2018? The FM Finally Answers for the final stance of India toward legality of Bitcoin.
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