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Tax cloud over cryptocurrency exchanges as income tax department eyes probe
January, 05th 2022

Fresh trouble could be brewing for the cryptocurrency exchanges as the income tax department is now contemplating investigating them over the tax applicable to their total income. This comes after the Goods and Services Tax (GST) department conducted searches in the past week on the crypto exchanges. The direct tax department could look into the quantum of corporate tax payable for the cryptocurrency exchanges, said people aware of the development.

In the last week, the Directorate General of GST Intelligence (DGGI), an investigation arm of the indirect tax department, conducted searches on several crypto exchanges and asked them to pay GST on their transaction fees or margins. The fear is that the tax department will question the way exchanges record their revenues.

"There is no clarity in the way the exchanges recognise revenues. Each firm does it as per their understanding of accounting and the income tax officials have concerns over the ambiguity," a person aware of the development said. "In some cases, the revenue recognised is several times more than the margins for exchanges. Margins are the real revenue for the exchanges, but that will need to be established with the tax department," a senior tax lawyer advising at least two prominent exchanges told  ..

Then there is the matter of the tokens issued by the exchanges and how to capture the increase in their value. Both the direct and indirect tax departments have started sharing data with each other to ensure better tax compliance.

The indirect tax department has already collected the data during the recent searches over non-payment of GST, and the data is now being shared with the direct tax department for further investigations. The department discovered that several cryptocurrency exchanges have been holding entities in tax havens like the Seychelles, the British Virgin Islands (BVI) and Mauritius.

Another person aware of the development said: "Holding structures and the way money is being sent out of the country could create income tax trouble for some of the cryptocurrency exchanges too".

At the core of the problem is how cryptocurrencies are categorised without any regulations in place.

Income tax rates on returns from various assets, such as currency, stock, gold, technology, services, or the lottery, can range from 10-42%. "From the taxability and valuation perspective, GST on cryptocurrency has been a subject matter of dispute. There is no clarity regarding whether cryptocurrencies are goods or services, but trading in cryptocurrency is not illegal," said Abhishek A Rastogi, partner at Khaitan & Co.

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