India might charge goods and services tax for cryptocurrency dealings

• The Central Board for Indirect Taxes and Customs is proposing to tax earnings from cryptocurrency transactions at 18%.
  
• Under the regulator’s proposal cryptocurrencies are to be designated as “intangible goods”.
  
• This should a welcome relief for Bitcoin traders and miners. By bringing digital currencies into the tax net, the government is legitimising trade in them.
  

After months of confusion over their legal status, it seems the Indian government is planning to regulate the trading of digital currencies like Bitcoin and Ethereum under the Goods and Services Tax (GST) regime. The logic is simple - if people are making money from it, it is a taxable event.

Anonymous sources told Bloomberg that profits from digital currency transactions could soon fall under the 18% tax slab - the same rate as software and electrical devices - if the Central Board for Indirect Taxes and Customs (CBITC) has its way. This is a little less than the tax rate in the US, where traders are expected to pay 20% on their earnings if they’ve held their digital currency for longer than a year.

Barring the tax level, details on how the trade of these currencies would be regulated in India weren’t revealed. And there is no clarity on their status as legal tender. However, the CBITC’s draft framework contained a number of key proposals.

Firstly, cryptocurrencies are to be designated as “intangible goods” while the processes involving their mining, storage and transfer will be designated “services”. As a result, cryptocurrency exchanges will have to pay taxes on commissions earned. Secondly, the value of a cryptocurrency will primarily be denominated in rupees. Thirdly, transactions that involve a party outside India will designated as imports in the case of a purchase and exports in case of a sale.

Finally, trading profits could be liable for retrospective taxation from the date of the GST’s implementation - July 1st, 2017. This could result in quite a revenue haul for the government. In January, Reuters reported that trading volumes in India were increasing by about ₹20 billion every month.

A step in the right direction

The news is likely a welcome relief for Bitcoin traders and miners. By bringing digital currencies into the tax net, the government is legitimising trade in them. It could also encourage more people to take part in the trading of these currencies.

The next step after taxation, however, is preventing the misuse of digital currencies and tax evasion. Last month, the Reserve Bank of India cracked down on cryptocurrency transactions, barring any regulated entities like banks from facilitating them after three months. The move was in response to concerns that money was being laundered through digital currency trades and the profits from such trades could be used to finance illegal activities. The order is currently being challenged in court.

Should the proposal to tax cryptocurrency trading under the GST regime be approved by the GST Council, then it will likely cause the RBI to revoke its outright ban. This would be a win for the government, because if the formal banking system were to embrace cryptocurrency trading, it would bring these transactions right under regulators’ noses and away from the peer-to-peer unregulated market.