If you are bored with the government debate whether cryptocurrency is asset or currency, then now a new debate awaits you. After the recent GST raid on crypto exchanges that trade virtual currencies like bitcoin, there has been a tug of war between the tax department and the crypto industry as to whether cryptocurrency is ‘goods’ or ‘services’. A virtual currency that cannot be seen, touched or confiscated by anyone. Neither its owner is known nor its purchase and sale i.e. supply chain can be traced. In such a situation, until there is a ban or regulation on cryptocurrency, a big challenge for the departments is to collect tax from it.
The Directorate General of GST Intelligence (DGGI) recently raided several crypto exchanges in the country. At present, the liability has been fixed by taking their fees and margins as the basis of earnings and has been asked to deposit the tax. If experts are to be believed, levying tax on fees and margins on the lines of common commodity exchanges means that the government is treating the work of crypto agencies as ‘services’, which attracts 18% GST. But some crypto agencies are seeking legal clarification on this. Since cryptocurrency is not mentioned anywhere in any law, nor does its trade match with any kind of existing trade, now this issue seems to be going to the top levels of the GST Council or the government.
Taxes on crypto?
The beauty of cryptocurrency is its private wealth. No one else can see or confiscate it. At present, it is difficult for the government to even know from which hands it has passed. Assessment, seizure or recovery is not possible under the Income Tax Act unless the currency owner himself declares how much he has invested or the department proves it from the available evidence. In such a situation, short term or long term capital gain also cannot be determined.
As far as indirect taxes like GST are concerned, if we consider cryptocurrencies as goods, then its valuation is not possible. At the most, only operators ie exchanges can be reached. Their fees and margins as services have been levied 18% GST, but here too there are many problems. Transaction fee is paid by the senders i.e. the seller of the currency to someone. But the determination of supply of services cannot be correct due to non-identification of the recipient. The biggest problem is that if a recipient or any crypto exchange is outside the country, taxation here will become even more difficult under the current laws.
What do experts say?
Noted GST consultant and chairman of the indirect tax committee of PHD Chamber of Commerce and Industry (PHDCCI), Bimal Jain told ‘The Lallantop’-
“A digital currency, which is powered by blockchain encryption i.e. coded technology. Where it is not decided whether to consider it as Goods or Services. Basic information like trade value and place of supply are missing. That is, who is buying, how much, from whom and whom, where is selling, nothing is known. In such a situation, taxability is like shooting an arrow in the dark. You do share trading. Securities may not be taxable, but processing or transaction fees and taxes are levied through exchange and brokerage house data. All this happens because the stock market is regulated. Until there is no regulation of cryptocurrency. It is not possible to recover proper tax from him.”
Bimal Jain compares trading of cryptocurrency with fake chit funds and pyramid schemes. Where one person keeps on collecting money from another and another from the third, with the belief that there will be a lot of returns ahead. But one day its head or company runs away. He told that if the government does not ban or regulate it, then the biggest danger is of getting trapped in the younger generation. The new generation is investing in crypto to earn returns overnight. There is no guarantee that the future will continue to meet its financial liabilities.
business model question
Cryptocurrency trading is based on a computer network where each terminal acts as a server in itself. It is also called peer to peer platform. DGGI has recovered 50 crores as tax and penalty from crypto exchange WazirX. But exchanges like Unocoin, which have come under the scanner, are yet to be given the final notice of tax and penalty.
These exchanges complain that the government has not been able to decide under which business model they should be treated. Some are being charged under the rules of the e-commerce market place and some are being charged under the brokerage regulation. But reports quoting GST officials said that the business model of these exchanges themselves is not the same. For example, exchanges like WazirX conduct peer to peer deals and charge commission in return. He has told this as his income. But exchanges like Unocoin and Coinswitch Kuber are acting as brokers or aggregators. They charge a fixed amount from the users on their profits.
According to officials, there is a need for more investigation and regulation of this model. Since GST is levied on value addition of business, it should be applicable at every step where profit is earned. This is possible when the currency is treated as a taxable good or commodity. That too when the government recognizes or regulates it.
How is crypto trading done?
You can roughly think of cryptocurrency as a token of a small-shop shop or a hundi between traders and brokers in the wholesale markets. That is, a slip of paper, which has no value at all, but in the eyes of the giver and the giver, it can be of hundreds, thousands or lakhs. The biggest strength of the hundi is that neither a thief can rob it, nor the police can catch it, nor can any authority impose tax. The price of the hundi was considered between two people. But the creditors and debtors of cryptocurrency are numerous. What sets it apart the most is its technology of use.
In technical terms, it is a digital document transmitted over a blockchain-based network, on which every transaction is signed. Every transaction is a block in itself. Basically blockchain is a software protocol. Just like there is SMTP (Simple Mail Transfer Protocol) for our email. This chain tells when the currency got out of whose hands and went to whom. Blockchain files reside across the network rather than on a single computer. Adding a new block to this chain is called crypto mining.
You have to join this network to buy and sell cryptocurrency. That’s where we help you, crypto exchanges. Here you open an account just like a demat or trading account for shares. The only difference is that these exchanges are self-regulated. That is, beyond the government rules and regulations. As we have mentioned above, how these exchanges have different business models. In such a situation, their fees are also broadly of three types – exchange fee, network fee and wallet fee. At present, tax agencies are deciding their tax liability by considering this fee as income.