Note: This blog is written by an external blogger. The views and opinions expressed in this post are solely those of the author.
The crypto landscape in India is still in its infancy. While policy makers are still figuring out how to bring regulation to the sector, Indian citizens have clearly shown interest in investing in crypto, as evidenced by the number of users.
“There are an estimated 10 million cryptocurrency users in India, and this will be 100 million globally.“
business Line (March 2021)
So, until there is some more clarity on the regulatory front, how should transactions in crypto be taxed? Before we delve deeper into the taxation aspect, let’s look at how crypto is viewed in the country.
concept of crypto
Today, many see crypto as a viable asset class for investment. The perception of crypto by its holders and policy makers plays a significant role in its taxation. Shri Anurag Singh Thakur (Ministry of Information and Broadcasting) also said He “Profits arising from transfer of cryptocurrencies/assets are subject to tax under the head Income, depending upon the nature of holding of the same.”
What are tax laws called?
Taxation can be in 2 forms: direct and indirect. For direct taxation, the most relevant law is the Income Tax Act, 1961. For indirect taxation, the prevailing laws are the Central Goods and Services Tax (CGST) Act, 2017, and its State/UT equivalents. Let us analyze them in detail:
crypto vis-a-vis income tax law
Anyone who has studied Indian taxation will tell you that there are five heads of income, namely, salary, house property, business (or profession), capital gains and other sources. Note that the word ‘crypto’ or ‘cryptocurrency’ is not used anywhere in any tax law. Since most people look at crypto as an investment instrument, let’s first analyze the capital gains aspect of the income tax law.
capital gains:
The Charging of Capital Gains section, section 45 of the Income Tax Act, 1961, levies tax on gains or gains arising from transfer of ‘capital assets’. Section 2(14), in its definition of the term ‘capital asset’, states that it shall include “…Property of any kind held by an assessee, whether or not connected with his business or profession”. Since it appears to meet the chargeability criterion, let us proceed with the calculation of tax.
Capital gains will generally be calculated along the following lines:
| sale consideration | |
| (-) | Expenses fully incurred in connection with the sale |
| net sales ideas | |
| (-) | (indexed) cost of acquisition |
| (-) | (indexed) cost of improvement |
| capital gains |
The expenses in connection with the sale will generally be in the nature of the brokerage, if any, levied by the crypto exchange. In the case of crypto, there can be no cost of improvement. Indexation benefit will be available only if the holding period is more than 3 years (long term). Short-term capital gains tax will be levied at the applicable slab rates, while long-term capital gains tax will be levied at a flat rate of 20%.
What if you had mined crypto instead of buying it? Will there be a clearly defined cost of acquisition? Mining crypto profitably obviously requires significant hardware, electricity and other costs. Can these costs be taken as cost of acquisition? Can you calculate such costs accurately? If we use the argument of Hon’ble Supreme Court in CIT Vs BC Srinivas Shetty (1981), it can be concluded that it is possible to apply the provisions of section 48 (for computing capital gains) if the cost of acquisition correctly traceable. Since it is not possible to ascertain the cost of acquisition accurately in case of mining of crypto, it should not be chargeable to capital gains tax.
Business:
As mentioned earlier, mining crypto profitably, requires a significant investment in the necessary infrastructure. If you have made such an investment, can it still be said that the crypto you have is only a form of investment? This brings us to another perspective, i.e., the taxpayer is engaged in the business of buying and selling crypto (including mining). The income from such business will be chargeable under the head ‘Profits and gains from business or profession’, and the calculation is relatively simple – treat crypto as your inventory and calculate the net profit of your business in accordance with the relevant provisions of the law. Calculate. .
other sources:
Even if you do not view your crypto portfolio as your capital asset or your business, any income you receive from it will be taxable in the remaining head of income – ‘Income from other sources’. Tax will be chargeable at applicable slab rates.
Crypto Vis-a-Vis GST Law
The Charging section of the CGST Act, Section 9 states that Central GST will be levied on all intra-state ‘supply’ of ‘goods’ or ‘services’ or both. Thus for a crypto-related transaction to be subject to GST, it has to be a ‘supply’ of ‘goods’ or ‘services’. The CGST Act provides for an inclusive definition of ‘supply’ under section 7, which depends on the following factors:
- Must be a ‘supply’ (includes sale, transfer, license, exchange, rent, lease, etc.)
- There must be an agreement (can be oral, written, silent, implied, etc.)
- for a thought
- by one person
- in the course of or in the course of business
The act of buying and selling crypto will meet all the criteria mentioned above. It remains to be seen whether crypto will be either ‘goods’ or ‘services’. The definition of the word “goods” in the Act includes: “… all kinds of movable property Apart from money and securities…” and definitions of services include: “….anything other than goods, money, and securities…”. Thus, crypto will be covered under the definition of ‘services’ as given under the CGST Act, 2017.
Based on the above, it can be concluded that crypto transactions are liable to GST. The applicable tax rate will be the residual tax rate of 18% to be used for the services. However, a person is generally liable for registration under the GST law only if his total turnover exceeds Rs. 2 million.
The question of crypto mining remains. Crypto mining is the process of solving complex cryptographic equations that lead to the verification and entry of crypto transactions into a blockchain network. More information about mining can be found here.
So here, you are providing the service of crypto mining and also being awarded by Blockchain network for the same. This can be viewed as an outward supply of service chargeable to GST. The consideration for this would clearly be ‘in commodity’ (crypto), and the law has laid down procedures for computing the value of the supply in such cases.
Expect
It is absolutely clear that #IndiaWantsCrypto. The way forward would probably be to provide a little more clarity in the law regarding its taxation. Given the public perception of crypto as an investment instrument, if the same approach is taken under income tax laws, it can be treated as a capital asset with its own special rate of tax. Similarly, under the GST law, if crypto can be treated at par with other securities such as shares, debentures, etc., it can be kept out of the purview of GST only to the extent of buying and selling crypto.
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