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Equalisation Levy could Make Life More Taxing for Cryptocurrency Buyers

New tax on overseas digital transactions could impact crypto assets’ returns



The cost of buying Bitcoins and other cryptocurrencies may have increased about 2% for investors who purchased them from exchanges outside the country as they are all set to face additional tax in the form of equalisation levy.

The tax department is now looking into whether the 2% levy is applicable on crypto assets bought online by Indians from overseas exchanges, people in the know said.

The government had expanded the scope of equalisation levy from this year to include any purchase by an Indian or Indiabased entity through an overseas platform.

“The way the new equalisation levy is worded and defined, it appears that it will also be applicable on cryptocurrency bought from an exchange not based in India,” said Girish Vanvari, founder of tax advisory firm Transaction Square. “The levy is on the selling price and companies may be required to add this to the cost of the crypto assets.”

Experts said there is no clarity as to whether cryptocurrencies can be categorised as goods, services or commodities.

“In the absence of any guidelines on the treatment of crypto assets, there is ambiguity in how these would be treated under the tax laws and FEMA (Foreign Exchange Management Act),” said Amit Maheshwari, tax partner at tax consulting firm AKM Global.

He said there is a possibility of the expanded equalisation levy (EL 2.0) being levied on offshore exchanges facilitating sale and purchase of crypto assets.

Since most cryptocurrency exchanges have not paid this levy, the taxman’s scrutiny now means that customers may have to cough this up, experts said.

Unlike other taxes, equalisation levy is on the selling price, which would mean that the cost of buying the crypto assets will jump by 2% for Indians — a substantial jump considering the volatility of the asset.

“The levy will not be applicable if the entity has a permanent establishment in India,” Maheshwari said.

However, many crypto exchanges in the last few years have created structures where they do not have a presence or permanent establishment in India and the Indian entity only takes care of marketing functions.

Many companies have moved to Singapore or Dubai in a bid to safeguard themselves from some of the Indian laws in the last few years.

Permanent establishment is a concept in tax laws that determines which country has the first right to tax a company and to what extent.

Equalisation Levy

Latest equalisation levy regulations define online sale of goods or services as any purchase that has been made online, online payment, or even an offer that’s accepted online. This essentially covers every transaction including crypto assets bought through these platforms, experts said.

The development comes at a time when the crypto exchanges are already facing issues with Indian regulators. The Reserve Bank of India (RBI) had issued an “informal” diktat to banks and asked them to stop dealing with cryptocurrency exchanges about a month ago despite a Supreme Court order setting aside a 2018 RBI circular to that effect.

After many cryptocurrency exchanges threatened to approach the Supreme Court, the central bank recently issued a fresh circular saying banks cannot cite the 2018 circular on cryptocurrencies as that was set aside by the Supreme Court in 2020.

There is a lack of clarity on how to tax crypto assets under direct and indirect tax regulations. Taxes mainly depend on how a product or service is categorised.

Cryptocurrency is not defined in any tax laws, though many exchanges have been demanding that it be treated as a commodity.

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