Let’s start with the basics. What is cryptocurrency?
In simple words, cryptocurrency is digital money.
Compared to real money, it is thought to be safer. Cryptography is a process used by cryptocurrencies to protect their transactions. To put it simply, cryptography is a technique for encoding understandable data in difficult-to-decipher codes. A subclass of virtual money, alternative currencies, and digital currencies are referred to as cryptocurrencies.
Although there is no regulation of cryptocurrencies in India, the government indicated in Budget 2022 that income from cryptocurrency transactions will be subject to a flat tax of 30% and a tax-deducted source (TDS) of 1%.
The RBI believes it must be prohibited. It has been unambiguous in its opinion. The government feels that it needs to be taxed until a law is created around it.
The government is currently working on an integrated solution for crypto assets, so indirect tax on crypto in India may be enforced shortly.
According to the latest report, defining these guidelines would stop any income loss to the exchequer caused by a lack of understanding regarding the actual character of these assets. The report also stated, citing sources acquainted with the process, that GST rates for cryptocurrency may range from 18 to 28%.
Changes In the Current Tax System On The Implications of GST on Crypto
The government assesses a 30% income tax on the capital gains earned from virtual assets, including cryptos, and it also applies a 1% TDS when purchasing them. In contrast to taxable income and TDS, which come under the direct tax group, if GST is applied to cryptos, the government will apply an indirect tax on this asset.
Direct tax or income tax seems to be the only tax system currently applicable to cryptocurrencies. Our direct income includes the direct tax rate of 30% currently levied on “Income from Crypto Assets.”
The GST, in contrast, is an indirect tax that is levied on the purchase or sale of products and services, and it is exclusively owed by consumers. So, the existing direct tax system will continue even if cryptocurrency is included in the scope of the GST.
What Happens to Crypto Transactions When the GST Regime is Introduced?
The future treatment of cryptocurrency transactions won’t be clear until the government releases new tax regulations for them. According to the GST law, “goods” include, among other things, all transferable property types excluding cash and securities.
Digital assets are still not considered “money” under GST since “money” is defined as “recognized currency or international currency accepted by the RBI.” Additionally, digital tokens do not meet the definition of “security” as it is used under GST law.
Crypto will be regarded as a “good” and subject to GST at the determined rate if it is taxed on the total or net value of the transaction. Any service costs or transaction costs for the exchange of cryptocurrency will apply to the established rate of GST if it is imposed on the processing fees.
What Effect Will This Have on Crypto Trading in India?
Investor enthusiasm has already been weakened by the direct tax on crypto in India, and the introduction of GST will make that situation worse. In addition, the decision to tax cryptocurrency is sure to allay investor concerns over a permanent ban on cryptocurrency transactions in the country.
The volume of trading on all markets would decrease under such a regime, and merchants would switch to foreign exchanges instead, which are not regulated by the Indian government. Additionally, users would try to transfer their cryptocurrency holdings from exchanges to personal wallets. It may potentially lead to a direct link between decentralized exchanges and clients for value-added services.
The trading of cryptocurrencies is anticipated to grow more problematic as a result of exchanges’ need to keep accurate records of their clients to be able to deal with them on time.
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The implementation of the GST regime will make cryptocurrency trading very difficult. The sorts of traders who must charge GST and those who do not will be specified by legislation. Additionally, there may be groups of traders who are eligible for input tax credits for the GST paid on purchases of cryptocurrencies and those who are not.