Centre works on tax framework to regulate cryptocurrencies

As India seeks global collaboration on regulating cryptocurrencies, with Prime Minister Narendra Modi identifying them at the Sydney Dialogue Thursday one of the key areas where democracies should work together, the Centre is deliberating on a taxation framework for the sector following concerns that digital currencies are skirting the banking system.

Government officials told The Indian Express that the Finance Ministry is leading these discussions, and the question of bringing the sector under the ambit of direct and indirect taxes are among the issues under active discussion.

The issue of regulatory gaps is also being discussed in meetings involving the Government and regulators such as the Reserve Bank of India (RBI), an official said.

For holders and traders of digital currencies, deliberations are underway to explore the possibility of imposing short term and long term capital gains tax, officials said. For service providers in the cryptocurrency ecosystem, the option of imposing GST at the rate of 18 per cent, in line with the rate for most services in the financial sector, is being explored, they said.

According to the officials, a key aspect being considered tobring cryptocurrency players under the regulatory ambit is broadening the definition of a brokerage to include entities that undertake or facilitate digital asset trades, which would include practically all cryptocurrency exchanges.

While the process of including these players in the GST ambit is expected to be long-drawn, given that a proposal has to be put up before the GST Council, official sources said that for direct taxes, the Finance Ministry has the option of taking up the issue through amendments to the Finance Bill.

“The issue of defining and regulating cryptocurrencies will be taken up through legislation, whereas taxation aspects need to be dealt with separately,” an official said.

Tax experts said that since cryptocurrencies are likely to be defined as an asset and not as a currency or medium of exchange, the main route to tax them would be through direct tax.

“Before you tax them, they have to be defined structurally and legally. It has the scope of being taxed through the category of financial services but apart from that, the buyer gets an asset which has an underlying value. Unless there’s a carved-out category like gold under GST, it would be tough to levy indirect tax. As an asset, the main way to tax it would be through direct tax on the net gains through trade in it,” an expert based in Mumbai said.

In April 2018, the RBI banned all banks from dealing with virtual currencies, effectively cutting off money supply into these digital assets. However, in 2020, the Supreme Court overturned the ban paving the way for start-ups to operate exchanges and trading platforms.

On Thursday, delivering a keynote address at the Sydney Dialogue, Modi referred to “cryptocurrency or bitcoin” and said: “It is important that all democratic nations work together on this and ensure it does not end up in the wrong hands, which can spoil our youth.”

Over the past week, discussions on cryptocurrencies have gained momentum with a meeting chaired by the Prime Minister Saturday agreeing that steps taken by the Government will be “progressive and forward-looking”.

Following this, the Parliamentary Standing Committee on Finance chaired by Jayant Sinha met key stakeholders in the cryptocurrency space in India Monday to understand their views and examine how to balance “regulation and innovation”.

The Reserve Bank of India, however, has been flagging concerns over the increased use of cryptocurrencies. On Tuesday, RBI Governor Shaktikanta Das once again strongly urged caution and voiced serious concerns.

“I would only like to say that when the RBI s the central bank of the country, which is entrusted with the responsibility of maintaining financial stability, after due internal deliberation says that there are serious concerns on macro-economic and financial stability, there are deeper issues… I’m yet to see serious, well-informed discussion in the public space on these issues,” Das said at a banking conclave.

Separately, some lawmakers have taken a stance on the legality of cryptocurrencies. Earlier this month, BJP Lok Sabha MP Nishikant Dubey wrote to the Prime Minister seeking a “complete and comprehensive ban on cryptocurrency mining, trading and investments”.

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