Following the recent income tax raid on one of the largest Indian crypto exchanges, WazirX, crypto exchanges may finally have found a way on how they should pay Goods and Services Tax (GST) on earnings from the non-monetary route, i.e., from cryptocurrencies and not only from Indian Rupees (INR), say experts.
Exchanges have argued there's a lack of clarity on how crypto assets are categorised and how different business models should be taxed.
"We could not pay the full amount in a timely manner due to the ambiguity around how the GST was supposed to be calculated. The tax department is now helping us do the calculation and categorisation and collecting the GST with interest,” said Sathvik Vishwanath, founder of crypto exchange Unocoin.
However, Vishwanath added that the tax department has internally interpreted crypto currencies as a digital asset. But, there is no official categorisation of digital assets under GST rules.
Rameesh Kailasam, CEO of IndiaTech.org, explained, “Since, currently, the laws and regulations do not specifically mention cryptocurrency or crypto assets, the tax authorities today have no option but to put them in an unnamed category and apply 18 percent GST. Ideally, they should apply 18 percent only on the platform fees earned and not on the value of the crypto traded.”
Crypto exchanges, like other marketplaces, typically charge a commission from customers while buying and selling tokens on their platforms. Exchanges like WazirX and CoinDCX allow users to facilitate peer-to-peer transactions and charge a commission on each transaction.
These transactions are done both in cryptocurrencies and INR. Unocoin and CoinSwitch Kuber, on the other hand, follow an aggregator model, through which the platform allows to buy and sell crypto currencies to its users.
“There were two issues. One was the categorisation of the crypto asset itself – whether it is a digital asset, security, or a physical asset. So that was not clear and everyone followed different rules while calculating GST. The second issue was about different business models as the taxation differs from simple trading platforms, aggregators, peer-to-peer exchanges etc. Taxation was not clear for different models because there are no precedents,” said Vishwanath.
According to industry sources, the GST department had reached out to all exchanges in November last year and taken the records.
“After the WazirX issue, the GST department has understood that there are earnings in non-INR methods as well, which levies GST. So, they will investigate other exchanges which will have similar transactions. So, either exchanges can identify this themselves and pay taxes upfront, along with interest. If not, they will have to face the authorities. A show-cause notice may also be issued. In that case, they will be asked to pay a penalty as well,” said Rashmi Deshpande, partner at law firm Khaitan and Co.
In an e-mailed response, a spokesperson from Zanmai Labs, which manages WazirX, said regulatory clarity is the need of the hour for the Indian crypto industry. “It will also provide us with more clarity on taxation so that we can work in sync with the lawmakers, and continue to be a responsible industry player.”
The company further said that there was an ambiguity in the interpretation of one of the components, and that led to a different calculation of the GST paid.
Crypto exchanges, including CoinDCX and CoinSwitch, did not respond to e-mailed queries.
“Sometimes, exchanges earn the commission in rupees, and sometimes in a crypto currency. So, there could be some mismatch on the GST that the exchange has paid on the rupee component, and not the crypto component of the commission,”said Anoush Bhasin, a chartered accountant who runs Quagmire Consulting.
“This is what the exchange shows to the government as service income, and this is what is leviable as per GST as well. So whether it is a digital asset, or the exchange is facilitating a universal purchase of a television, they are making a commission or a brokerage on top of each trade and the government will levy an 18 percent GST on that commission.”
Year 2021 saw a massive boom in individual investors with top exchanges crossing millions of investors, which also led to a higher tax collection. Experts say that the industry is evolving and so are the payment methods, which makes the process of GST calculation more complicated.
“The technology is so complex and the tax authorities are trying to keep up with the evolving ecosystem. But for tax authorities and investigators, there is no clarity in terms of taxation yet for such transactions. We are hoping that the government will provide clarity on tax treatment through the upcoming regulations,” said Deshpande.
Industry experts added that with the crypto industry being in the limelight and the pending bill, exchanges were likely to come under the scanner. The crypto traders could also come under the scanner, say the experts.