Understanding Goods and Services Tax on Cryptocurrency and Digital Assets

The rapid expansion of crypto and digital assets necessitates a clear comprehension of their Goods and Services Tax (GST) implications. Since these transactions are categorized as goods sales, they are subject to GST regulations. This article outlines the application of GST, the prevailing 18% tax rate, and the essential compliance requirements for cryptocurrency exchanges.

Core Insights

• Cryptocurrency is classified as goods for GST purposes.
• A GST rate of 18% is currently levied.
• Crypto exchanges are required to comply with stringent registration and record-keeping mandates.
• Businesses can claim Input Tax Credit (ITC) for GST paid on crypto-related purchases.
• Advance rulings offer regulatory certainty regarding GST application to digital assets.

Meaning of Crypto or Digital Assets Under GST

The Goods and Services Tax (GST) Act itself does not provide a specific definition for crypto or digital assets. Therefore, the definition from the Income Tax Act is generally referenced. A virtual digital asset is understood as any digital information, code, number, or token that holds value, facilitates financial transactions, and can be stored or transferred electronically. This classification explicitly excludes both Indian and foreign fiat currencies. The definition further encompasses non-fungible tokens (NFTs) and any other digital assets officially designated by the Central Government. Moreover, it includes crypto-assets leveraging cryptographically secured distributed ledger technology or similar methods for transaction validation and security, irrespective of whether they fit prior categories.

Classification of Crypto Under GST

For GST purposes, goods are defined broadly as movable property, actionable claims, crops, and items detached from land prior to sale, specifically excluding money and securities. Money encompasses legal tender, foreign currency, checks, and other Reserve Bank of India (RBI) recognized instruments for settling debts. Securities, on the other hand, include shares, bonds, debentures, derivatives, and comparable financial instruments. Given that crypto assets do not align with the definitions of either money or securities, they are presently classified as goods under the GST framework.

Applicability of GST on Crypto Transactions

In the absence of any exemptions in Schedule III or specific opposing notifications, the sale or transfer of cryptocurrency and digital assets is entirely subject to GST. Transactions involving assets obtained via exchanges or self-generated through mining are considered taxable supplies. GST is levied on various service-related fees, including:

• Platform trading fees
• Withdrawal charges, where applicable
• Conversion fees for crypto-to-crypto trades
• Service charges for futures trading or copy trading.

Importantly, the actual purchase value of the crypto asset itself is not subject to GST, nor are transfers to personal wallets that incur no service fees.

GST Rate on Cryptocurrency

Presently, no distinct Harmonized System of Nomenclature (HSN) code or specific GST rate has been allocated solely for crypto or digital assets. Typically, these transactions are categorized under HSN code 960899, designated as 'other miscellaneous articles,' which carries an 18% GST rate. It is important to note that this classification and rate may be updated as regulatory guidelines for digital assets develop further.

GST Compliance for Crypto Exchanges

Services offered by cryptocurrency exchanges to Indian users are categorized as Online Information and Database Access or Retrieval (OIDAR) services under GST, attracting an 18% tax on their transaction or service fees. This classification applies equally to both international and domestic platforms. Consequently, all exchanges are obligated to register for GST and collect tax from Indian users, regardless of whether their turnover surpasses the Rs. 20 lakh threshold. Essential compliance requirements include:

• Applying GST to all service fees and commissions.
• Collecting and remitting the appropriate tax amounts to the government.
• Maintaining clear and comprehensive transaction records for auditing and regulatory adherence.

ITC Claims for GST on Crypto or Digital Assets

According to GST law, the Input Tax Credit (ITC) is only permissible when goods or services are utilized for commercial activities. Businesses engaged in crypto or digital assets are eligible to claim ITC on the GST paid for acquiring digital assets or any other goods and services directly used in their crypto operations. This eligibility extends to expenses like broker commissions, consulting services, software subscriptions, and costs associated with mining, provided these are incurred for business objectives.

Advance Rulings in Implementing GST on Crypto

Advance rulings have proven to be an effective mechanism for cryptocurrency exchanges seeking definitive guidance on their GST responsibilities. Such rulings offer an official legal interpretation of GST application, promoting uniform compliance throughout the sector. This process contributes to a more stable and predictable regulatory landscape for both investors and exchanges, especially within a rapidly changing market.

Conclusion

A thorough understanding of Goods and Services Tax (GST) on cryptocurrency and digital assets is essential in the evolving digital economy. With digital assets categorized as goods and an 18% GST rate currently applied to related services, both exchanges and traders are required to maintain rigorous compliance and meticulous record-keeping. Ongoing clarifications from advance rulings help market participants stay informed and adhere to regulations within this constantly changing environment.