Crypto industry is looking for a dialogue with the Government as the Goods and Services Tax (GST) Council may now put cryptocurrencies and related services under the 28 percent tax slab. The Government had already levied to the 30 percent tax on gains from crypto assets and a 1 percent tax deducted at source (TDS) on transactions.
The industry has already witnessed a massive drop in transaction volumes over the last one month, since the income tax came into effect on April 1, and the possibility of a higher GST rate is likely to damage the industry further.
From discussions with industry participants, Moneycontrol learns that exchanges are worried about what this could mean for the future of crypto trading in India.
“We are obviously not happy with this thought process. It's going to get very difficult if they take such a view. No country has taken such a view and the upcoming TDS is already challenging. Frankly, we don't know what the thought process is, do they want to ban it without banning it? We have no idea,” said an industry source who did not wish to be named.
He added that the industry hopes to approach the government for talks.
“For something like this, ideally, we would want to have some facetime with the government. On the one hand, we have heard that the government will take its time but on the other that it may regulate the industry soon, these are mixed signals,” said the person.
Akshay Aggarwal, venture partner at Draper Dragon Fund, believes the proposed measures will further fuel the trend of crypto exchanges and talent moving out of India.
“Apart from retail investors, it would also affect algo crypto traders who trade based on algorithms. While trading volumes will be hit, these exchanges are registered outside of India and they will start foraying into other markets,” he said.
The possibility of a 28 percent GST rate on crypto was first reported by CNBC-TV18. Crypto exchanges are currently paying 18 percent GST on services provided by them. And while the date for the next GST Council is yet to be decided, experts expect a decision soon.
“Now that a rate of 30 percent tax coupled with a 1 percent TDS has been announced for income tax, the next major announcement is the rate of GST and how it is going to be treated. The definition of VDAs (virtual digital assets) is likely to be similar to what is there under the IT regulations,” said Rashmi Deshpande, partner at corporate law firm Business Law Chamber.
“Keeping in mind the high rate of tax on income, the reasonable expectation would be to have a fair rate under GST to ensure that not only the government gets its revenue but the industry also sustains. It also needs to be seen if the government comes up with any different set of rules for crypto assets, like a valuation mechanism,” she added.
More importantly, the industry is still dealing with a lack of clarity on multiple factors when it comes to the income tax itself. A new diktat even before the previous questions are answered will only create more confusion for customers and exchanges.
“Before levying tax and GST, the government should have given some clarity around the industry. This 28 percent GST will mostly be borne by the customers now, which will obviously make it difficult for them to trade. Also, if an investor is transacting on an international wallet, how will they pay the GST?” said Kashif Raza, founder of crypto education platform Bitinning.
The 1 percent TDS too is seen as onerous enough to discourage customers and create tonnes of extra paperwork for the government as well.
In the past month, some banks including Kotak Mahindra Bank have withdrawn support from crypto exchanges, leading to a reduction in payment method options on platforms. This was a domino effect after US crypto exchange Coinbase was forced to hold off from having the Unified Payments Interface (UPI) on its platform.
Moneycontrol had reported that the move by banks and the National Payments Corporation of India which operates UPI was more out of disquiet arising from Coinbase’s very public announcement.
But it is the GST levy that has players really worried. Sathvik Vishwanath, founder and CEO of exchange Unocoin, said, “A 28 percent GST will cause major disruption for the industry. Income tax is levied only on the profit, but GST may be levied on the complete transaction amount and that will be huge.”
On the other hand, for crypto investment platform Mudrex's co-founder Edul Patel, the rate is not much of a concern.
"We are already paying 18 percent GST, 28 percent will not change much. Plus with the 30% income tax and TDS it was already clear that the government doesn't want to encourage trading. This another step towards that."The industry might not get a very sympathetic hearing given that the government and the Reserve Bank of India continue to have concerns that cryptos do not come under the ambit of the Prevention of Money Laundering Act and Foreign Exchange Management Act and hence can be used for financing unscrupulous activities and for money laundering.