New plan to tax blockchain ecosystem in the works amid wide adoption of NFT

With the wide adoption of non-fungible tokens (NFT) in the country, the government is again examining the proposal to tax the blockchain ecosystem, which includes cryptocurrencies and such digital tokens.

The use of NFTs has picked up at a large scale, with celebrities endorsing them and they have been been commercialised, an official said. Investment in cryptocurrencies has also increased lately and there is a need to tax them, he added.

The tax department wants the framework to tax the use of blockchain for commercial purposes to be implemented even before the government brings in legislation for cryptocurrencies and regulating the official digital currency. A Bill on this is expected to be introduced in the winter session of Parliament.

The push comes in the backdrop of surging investment by Indians in cryptocurrencies. The investment is about Rs 6 trillion (according to industry estimates), and endorsements of NFTs by Bollywood actors such as Amitabh Bachchan and Salman Khan. Actor and politician Kamal Haasan is set to become the first Indian celebrity to launch his own digital avatar in metaverse.

Separately, the government is working on legislation that will create a “facilitative framework” for introducing an official digital currency, which the Reserve Bank of India (RBI) will introduce. Even when virtual currencies and NFTs are not regulated, their use is prevalent and is leading to a loss of revenue for the government, the official quoted above said.

Taxing such assets will not mean that trading in them will be legitimised, and would only be a step to tax such transactions, which are currently skipping the tax net, the official said.

“The legality of the asset per se is of no consequence to taxability,” the official said, citing a recent representation being considered by the Tax Research Unit, which comes under the Department of Revenue of the Ministry of Finance.

A similar plan to tax cryptocurrencies was considered in 2018, when trade in the virtual currency had started flourishing. The framework for taxing blockchain would stay even as the government decides to ban or regulate such assets because blockchain can be used in many areas, the official said.

A framework for taxing the use of blockchain in other areas and sectors is also likely to be drawn up, the official said. NFTs and cryptocurrencies are intangible assets, and such assets are treated as services under the goods and services tax (GST) regime, the official said.

Transactions in cryptocurrencies such as transfer, storage, supply, exchange, management, trade and creation must be treated as “services” under GST, the official said.

Such transactions related to cryptocurrencies must be treated as online information and database access or retrieval (OIDAR) services, bringing them at par with provisioning software and other digital goods under GST. For taxation, the place of supply of OIDAR services will be the location of the recipient of services where both buyer and seller are outside India. For cross-border OIDAR transactions, the liability of compliance will fall upon the supplier in the case of a business-to-consumer (B2C) transaction.

In the case of B2C transactions done within the country, the place of supply for taxation would be considered as the location of the supplier in the case of transactions done by individuals. For business-to-business (B2B), the place of supply would be considered the location of the registered buyer.

Creating cryptocurrencies and sending and receiving virtual currencies “as gifts” will be considered as supplying intangible goods, and would be liable to GST. Mining cryptocurrencies and third-party wallets that facilitate transactions in virtual currencies would be treated as “supply of service”, and be liable to pay GST.