Even as the indirect tax department initiated investigations against several crypto exchanges for escaping Good and Services Tax (GST) liability, it may have also set a precedent around the categorisation of crypto assets for taxation. 

Legal experts have long debated on the categorization - and tax treatment - of cryptocurrencies. They are yet to converge on whether a cryptocurrency is indeed a currency, a commodity, a service, or something else. 

The Directorate General of GST Intelligence (DGGI) conducted searches and raids on several crypto exchanges and asked them to pay GST on their transaction fees or margins. 

The tax department's stand, say tax experts, could mean that at least part of what exchanges provide can be categorised as services. "GST on cryptocurrency has been a subject matter of dispute from the taxability and valuation perspective," said Abhishek A Rastogi, Partner at 

Khaitan

& Co. "Transaction fees are always paid by senders; these will be part of consideration as they are made in cryptocurrency in response to the supply of services by the recipient of services, and cryptocurrencies are rewarded by the blockchain system to the crypto miners on successful verification of transactions." 

The tax department's stand to slap an 18% GST on the margins and services provided by the exchanges is similar to what commodity exchanges and other intermediaries have to pay in India. 

Crypto exchanges are seeking clarity on the issue. "Currently, we don't have any crypto-specific provisions in the GST and Income tax laws but are seeing clarity on the tax interpretations and are abiding by an 18% GST on the exchange revenues from fees and various charges," said Sumit Gupta, Co-founder & CEO at CoinDCX. 

"There was an ambiguity in the interpretation, and we have complied and voluntarily paid GST. We have always been and will continue to be compliant with all tax-related matters," said a WazirX spokesperson. 

DGGI has initiated investigations against all top exchanges, including WazirX, CoinSwitch, Kuber and CoinDCX. 

Even industry bodies believe the tax department's stand is justified and will only bring in more clarity. 

"The department (Tax) wants to check that all the brokerage/commission earned by exchanges has drawn GST at 18% and we agree with that," said Vikas Ahuja, Member of Blockchain and Crypto Assets Council (BACC). 

"The core issues that certain Indian crypto exchanges faced were along the lines of the commission charged by some exchanges on transacting through their native token. For example, an Indian exchange could allow users to transact via INR or through their native token, " said Edul Patel, CEO and co-founder of Mudrex. 

There is currently no clarity on how much tax is levied on cryptocurrency under income tax or GST regulations. This is mainly because of the ambiguity around categorising cryptocurrencies such as Bitcoin and other assets. 

Many exchanges have started stating that the whole issue was mainly around compliance and that they accepted the taxman's stand. "Currently, in India, there is a lot of ambiguity around the taxation of crypto assets and filing procedures, said Shivam Thakral, CEO of BuyUcoin. 

As to whether they can be treated similarly to currency, equity, gold, technology, services, or like a lottery, income tax rates on returns from different assets are separate and range from 10% to 35%. The GST rates could vary from nil to 28% depending on the category. 

This is not the first time the cryptocurrency has found itself in the crosshairs of the tax authorities. In 2017, tax investigations were carried out where top executives and promoters of some cryptocurrency exchanges were asked to explain their business model and how much indirect tax - either service tax or value-added tax - could be levied. 

The tax authorities wanted to understand how to tax the revenues from the exchanges. 

The problem was not just about sales tax and VAT but also about goods and services tax, as to how bitcoins could be treated under GST. 

This also comes at a time when there is regulatory ambiguity around cryptocurrency. The government is discussing with stakeholders whether cryptocurrencies should be completely banned or whether they should be allowed in a limited way where the Reserve Bank of India (RBI) will primarily regulate them, ET reported on December 11.