India may impose an 18% tax (GST) on Crypto trading volume in an initial step towards Crypto regulation

After considerable flip-flops over Crypto regulation or outright banning for the last few years, it now seems that the Indian government may be moving towards some definitive steps to regulate Crypto/Bitcoin as an intangible asset (tech/digital assets/commodities) rather than a legal/illegal tender (currency).

The Indian government may impose an 18% flat tax (GST) on trading volume by Indian citizens (liable to pay taxes in India) for all Crypto service providers (domestic as well as foreign). Presently, India-based Crypto service providers collect and pay 18% GST on trading charges only, not on overall volume.

India’s flip-flops over Crypto trading policy:

In April of 2018, India’s Central Bank (RBI) had issued a statement and advised all entities (banks & financials) regulated by it not to deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling them. In 2018, the Indian finance ministry had also issued an official statement on Cryptos:

‘the government does not consider cryptocurrencies as legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or a part of the payment system, but the government will explore the use of Blockchain technology proactively for assuring in the digital economy.’

Furthermore, in mid-2019, a government committee had recommended banning all private Cryptocurrencies transactions, and even propose a jail term of up to 10 years as well as heavy penalties for anyone dealing in digital currencies. However, the Indian SC in March of 2020 overturned RBI's 2018 circular, permitting banks to handle Cryptocurrency transactions from Crypto traders and exchanges.

Indian Crypto trading is on the rise after RBI clarification:

In the last few months investing in the price of Cryptos in India was boosted by a recent RBI clarification that its 2018 circular preventing banks from dealing in virtual currencies is invalid and cannot be cited anymore by any banks to prevent Crypto-related payment procession processing, as it was already set aside by the SC in 2020. 

Indian investors and traders who are interested in investing in the price of Crypto assets like Bitcoin as CFDs may use the service of various foreign or domestic Crypto platforms and brokerages

India was planning to impose 18% tax/GST on Crypto transactions from December of 2020:

Back in December of 2020, the Indian government was reportedly planning to levy on all domestic Crypto exchanges 18% GST tax on transaction volume with for Indian nationals/citizens. As per some unofficial report, the CEIB (Central Economic Intelligence Bureau), a wing of the Finance Ministry, had submitted a draft proposal to the country’s indirect tax authority (CBIC-Central Board of Indirect Taxes & Customs) to impose 18% tax (as GST) on Crypto trading volume, estimated around Rs.40B, which will earn revenue for around Rs.7.2B for the government. 

Although at that time, Indian government officials denied such reports as ‘speculative and unfounded’, various local Crypto exchanges were crying foul that any unilateral 18% GST on transactions volume will shift volume/business to foreign Crypto exchanges. 

As per reports, the CBIC is now also exploring whether overseas Crypto exchanges that have a customer base in India are required to pay GST when they provide certain data services as per Indian law. According to Indian tax laws, almost all transactions that involve Indians consuming goods and services invite a GST charge. And these charges could be 18% for Crypto exchanges. The Indian government could categories services provided by overseas Crypto exchanges that allow Indians to trade on their platforms as online information database access and retrieval (OIDAR) services. The OIDAR rules say any digital or data service provided to Indians or people based in India should be taxed.

Looking ahead: India may regulate Crypto trading rather than an all-out ban

India’s Modi admin may be now aiming to prevent huge money laundering, corruption and various criminal activities including terrorism funding using Crypto platforms, and thus may impose GST taxation and regulation in some form, which will force KYC verification documents onto of Crypto traders and investors and actual beneficiaries.

India may never allow Cryptos like Bitcoin as a legal/illegal tender in the country but may legalize Crypto trading/investments by some regulations and may also adopt Crypto techs like Ledger distribution technology for easing of voluminous data processing capacity.

Cryptos are not illegal in India per se. But India does not have a regulatory framework to govern Cryptos as of now, as it does not fall into any recognized asset class like currency or commodity. The Modi admin had constituted an Inter-Ministerial Committee (IMC) in November of 2017, to study virtual/digital/Cryptocurrencies. The Group's report, along with a Draft Bill, pointed out the prospect of Crypto distributed-ledger technology and suggested various applications, especially in financial services, for its use in India, including banks and other financial firms.

But the Indian government had flagged reservations about Crypto misuse and wanted to put a blanket ban in India. However, it now seems that cryptos may not face an outright ban in India. The Indian government may soon set up a panel to regulate them. Recently, the Indian government has taken some steps towards regulating Cryptos in India. The Indian Government has made it mandatory for companies to disclose crypto trading/investments during the financial year. 

The accounting of crypto assets is aimed at curbing money laundering via cryptos. The Indian Federal government has assured crypto stakeholders there won't be a blanket ban on digital currencies and planning some Cypto policies. Indian Finance Minister Sitharaman recently said the government has an open mind regarding the adoption of new techs like Cryptos. While the Indian government has some reservations regarding Cryptos, it’s also working on its digital currency backed by Central Bank (CBDC). The Modi admin does not want to be behind the curve of new techs and also aims to take the benefits of game-changing tech like Blockchain/LDT.

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