By Aashima Sawhney
With the announcement of the Union Budget 2022-2023, the cryptocurrency industry in India is back in the spotlight. Until last year, the government seemed inclined toward taxing cryptocurrency based on the nature of its holding.
However, within a year, the Ministry of Finance took a completely different and classification agnostic approach and from April 1 2022:
· 30 per cent tax (plus applicable surcharge and cess) is applicable on transactions involving cryptocurrency transfers;
· the receipt of cryptocurrency for no / inadequate consideration is taxable in the hands of the recipient, subject to certain exceptions.
Additionally, from July 1, 2022, any person paying consideration to a resident of India in exchange for cryptocurrency would be obligated to withhold tax at the rate of one per cent on the consideration so paid, subject to certain monetary thresholds. Further, where the consideration payable is wholly or partly in-kind, the payer must ensure that tax is paid in respect of such transaction before paying the consideration.
Issues with the new taxation framework
While the new taxation framework is a significant step in the right direction to bring clarity concerning the taxation of cryptocurrency, there are still several open-ended issues within the framework, including:
· Classification agnostic: The new framework levies a uniform tax rate on all transfers of cryptocurrency, i.e., key players in the crypto industry such as traders, miners, investors etc., are all subject to the same rate of tax irrespective of the nature of the cryptocurrencies held.
Accordingly, individuals/businesses engaged in the trade of cryptocurrencies would not be taxed at ordinary slab rates (unlike traders of any other commodity) but a fixed high rate. On the other hand, investors would be subject to the same tax rate irrespective of the period of holding units of cryptocurrency. Hence, the new regime steps away from the settled principles of tax law wherein paramount importance is given to the essence of every transaction, and a clear distinction has always been maintained between the transfer of capital assets and stock-in-trade.
· Meaning of transfer: In the context of cryptocurrencies, the Finance Act, 2022 clarified that the meaning of the term “transfer” shall be the same as that used for the transfer of capital assets (i.e., the sale, exchange or relinquishment of the asset, extinguishing any rights therein etc.), irrespective of whether cryptocurrencies are held as a capital asset or not. However, in the case of mining or staking, a reward is paid to the miners and stakers. The coins are not paid by an entity but are won on the network. Hence, there is no transferor per se. Therefore, there is a lack of clarity even after such clarification on whether the term ‘transfer’ would include the activity of mining and staking cryptocurrency.
· Valuation: An important criterion for levying any tax is to have a valuation mechanism in place. However, the new framework does not enlist factors that should be considered to value cryptocurrencies and accordingly compute the tax.
· TDS mechanism: The withholding obligation under the new framework will have a significant adverse impact on the liquidity in the cryptocurrency ecosystem and discourage innovation in this space. As set out above, where the consideration payable is wholly or partly in-kind, the payer must ensure that tax is paid in respect of such transaction before paying the consideration. Enforcing this will be difficult and may result in the payer being held in default. Hence, from a compliance perspective, there may be certain practical challenges while implementing the withholding provision.
· GST: While there are open issues with the income tax framework, income-tax is not the only tax potentially leviable on the transfer of cryptocurrencies. There is also GST, about which there is a complete lack of clarity.
In light of the above issues, Vidhi Centre for Legal Policy’s recent working paper ‘Taxing Cryptocurrencies: the concept, the challenges and the required changes’, states that as a first step, the government should examine how cryptocurrencies would be classified both under the income tax and the GST framework.
The working paper further states that it is essential to identify the potential taxable events in cryptocurrencies’ life-cycle, i.e. (i) the creation of cryptocurrencies; (ii) their initial distribution or acquisition; and (iii) their subsequent disposal.
Based on such identification, the working paper recommends two courses of action.
First, India should include cryptocurrencies in the classification of capital assets or stock-in-trade as it stood prior to the amendment of 2022, like other jurisdictions and levy tax accordingly. Though, this step should be backed by certain clarifications. Further, the withholding provision should be done away with.
Second, in the context of GST, the Central Board of Indirect Taxes and Customs’ stand on the nature of cryptocurrency – whether it is “money” or “goods” (backed by a detailed assessment) should be explicitly clarified and made publicly available.
If the said assessment suggests cryptocurrencies constitute “goods”, then an amendment should be made to the GST law specifically including cryptocurrencies within the definition of “goods”.
However, several issues emanate from classifying cryptocurrencies as goods under the GST law. For instance, given that the GST mechanism is essentially based on identifying the place of supply of a good or service, the decentralized and pseudo-anonymous nature of cryptocurrency transactions, ascertaining its location, and in cases such as block rewards, ICOs and pre-mine drops, ascertaining the two parties involved may be an extremely difficult task.
Accordingly, there is a case to be made in support of treating cryptocurrencies at par with money for the limited purposes of the GST law. This approach will foster neutrality, simplicity, transparency, and certainty in the framework.
Aashima Sawhney is a Research Fellow at Vidhi Centre for Legal Policy.
Vidhispeaks is a fortnightly column on law and policy curated by Vidhi. The views expressed are of the fellow, and do not reflect the views of Vidhi or Bar & Bench.