Representational.

Centre working on bringing cryptocurrencies under tax framework

New Delhi: The Indian government is deliberating on a taxation framework for the sector following concerns that digital currencies are skirting the banking system, sources from the government told The Indian Express (TIE).

Meanwhile, Prime Minister Narendra Modi, addressing the Sydney Dialogue on Thursday, called for democracies to work together on regulating cryptocurrencies, TIE reported. Modi said that these currencies should not end up in the wrong hands, which might "spoil the youth."

According to sources, the Finance Ministry is holding discussions on bringing them under direct and indirect taxes. Also, regulatory steps are being discussed in these meetings, which were attended by regulators such as the Reserve Bank of India (RBI).

The possibility of imposing short term and long-term capital gain tax for traders and holders of digital currencies are also being looked into. For service providers in this currency system, setting GST at the rate of 18 per cent, the same as in most services in the financial sector, is under discussion.

The key aspect under consideration to bring cryptocurrency players under the regulatory ambit is broadening the definition of  brokerage, including entities that undertake or facilitate digital asset trades. This would practically include all cryptocurrency exchanges.

Sources said that the process of including these players in the GST ambit would be long-drawn since a proposal has to be put up before the GST council. But for direct taxes, the Finance Ministry can take up the issue through amendments to the Finance Bill. They said that defining and regulating cryptocurrencies would be taken up through legislation, but taxation aspects need to be dealt with separately.

Meanwhile, tax experts said that since cryptocurrencies are more likely to be defined as an asset than a medium of exchange, taxation will be mainly through direct tax. An expert opined that the currency has to be defined structurally and legally. It could be challenging to levy indirect tax on it, he said.

Although the RBI had prohibited all banks from dealing with virtual currencies in April 2018, the Supreme Court overturned the ban in 2020, letting start-ups operate exchanges and trading platforms. However, RBI has flagged its concerns over the currency, and its increased use, multiple times.