What does a GST probe against exchanges mean for crypto taxation?

The dawn of the new year failed to bring with it any regulatory clarity on cryptocurrencies or how they can be taxed in India. And this has its consequences.
 
Last week, the Central Goods and Services Tax Mumbai Zone said, it had detected GST evasion of Rs 40.5 crore on commission earned by Indian crypto exchange WazirX. 
 
The Mumbai-based crypto firm had to cough up Rs 49.2 crore, which included its GST dues plus interest.
 
The contention was that WazirX wasn’t paying GST on the commissions that it charged on transactions through its platform. 
 
If the transaction is in Indian rupees or cryptocurrencies such as Bitcoin and Ether, WazirX charges a commission of 0.2%. But if the transaction is in WazirX’s own native utility cryptocurrency called WRX, the exchange charges a commission of 0.1%.
 
The tax authorities have claimed that WazirX was only paying GST on the commission it earned in INR, but not on the commission it earned in its own cryptocurrency WRX. 
 
The argument seems to be that by facilitating peer-to-peer transactions on its platform, WazirX is providing a service, which is taxable at 18% GST. This is similar to what commodity exchanges and other intermediaries have to pay in India.
 
After GST recovery from WazirX, the Directorate General of GST Intelligence under the Ministry of Finance has reportedly launched probes into the commission structure of various other crypto exchanges, investigating whether there are more cases of GST evasion. 
 
Crypto exchanges, on their part, have claimed that the issue arose because of lack of regulatory clarity on the treatment of cryptocurrency as a currency, a commodity, a service, or something else. 
 
If the WazirX incident serves as precedent, then at least part of what crypto exchanges provide can be categorised as services and taxed accordingly. This could provide some clarity to Indian crypto exchanges going forward. Indian crypto firms also await clarity on how to treat the income made through crypto investments. 
 
While there is no clarification from the government on that front either, industry players have built a consensus. 
 
Users are advised that if they’ve made a small profit and cashed in before 36 months, then such gains from cryptocurrencies will have to be listed under ‘other income’ in the tax form, and be paid as per the tax bracket applicable to them. If cryptos are held for more than 36 months, then gains should be classified as ‘long-term capital gains’ and will be subject to tax at 20%, plus applicable surcharge and cess.
 
Indian crypto exchanges are also routinely probed for violating the Foreign Exchange Management Act, which permits cross-border barter-only through authorised banking channels. In this context, cross-border crypto transactions being facilitated by Indian crypto firms are seen running afoul of India’s FEMA rules. 
 
More clarity is expected along these lines every year during the budget session. It remains to be seen if India’s long-awaited Bill to regulate cryptocurrencies will see the light of day next month. 

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