Mumbai: Transactions involving Indian exchanges and those outside India, especially involving procurement of crypto assets that are traded in India, could come under the taxman’s lens. 

The tax department is scrutinising how exchanges that allow trading in India manage their cryptocurrency float, and whether there is any element or any transaction where Goods and Services Tax (GST) could apply, people aware of the development said. 

Currently, several exchanges operate in India but only a handful—mainly the large ones—tend to have actual cryptocurrencies on their books to be bought or sold by Indian traders and investors. Some of the large exchanges also have holding entities outside India that primarily hold a large chunk of crypto assets. 

These are then “transferred” to the Indian entity, before any Indian could buy it. Some other exchanges tend to match trades between buyer and seller. In many cases, either the buyer or the seller is also based outside India but the trade happens through the exchange. 

In some cases there are also transactions between two exchanges that are recorded as “transfer," say insiders. 

The tax department is scrutinising whether these transactions involving exchanges could also attract additional GST. 

This comes about two months after the Directorate General of GST Intelligence (DGGI), the investigation arm of the indirect tax department, had conducted searches and raids on several crypto exchanges and asked them to cough up GST on their transaction fees or margins. 

The tax department’s stand, say experts, could mean that at least part of what exchanges provide can be categorised as services. 

“Various exchanges have different mechanisms to procure cryptocurrencies that are traded in India. The government could look to define all the transactions even involving exchanges that could attract GST,” said Gaurav Mehta, founder of Catax, a cryptocurrency tax consultancy firm. 

Earlier 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.