Heavy taxes are fine for quasi-assets like crypto

News: The government seems ready to expand the scope of goods and services tax (GST) to cryptocurrency transactions. Reports suggest it may impose crypto-token purchases with GST, just like on any other product. The entire value chain s expected to be included into its tax net.

Presently, services provided by crypto exchanges are taxed at 18%.

How Crypto transactions would be taxed under GST?

Taxing tokens would involve their classification as either goods or services, both of which are under GST rules. The tax rate of 28% is said to be under consideration on the argument that these are purely speculative buys, like casino chips or lottery tickets.

Why Crypto tokens are likely to be treated as purely speculative assets?

Due to the following reasons:

– These tokens began life online as tokens of exchange, but most of them ended up as stores of value and lures for capital gains, due to short supply and an increased investor interest.

– They typically bear no underlying claim on any issuer.

– They are not contracts and offer no interest returns or share of profit generated by underlying businesses. Hence, the casino-chip analogy holds true.

Why classifying Cryptocurrencies is the right policy approach?

– Classifying cryptocurrencies properly is crucial to regulating them. Moreover, their decentralized nature means they could exist in perpetuity.

– Our Central bank can’t be deprived of its domestic monopoly on legal tender, as that would impair its monetary authority, only an officially-issued crypto can be accorded ‘currency’ status.

– Moreover, unlike bonds and shares, which are tools of capital allocation, crypto coins serve no productive function.

Is a lower tax rate more appropriate for Crypto transactions?

For the sake of market activity, a light levy like a securities transaction tax (of 1% or less) may be more appropriate.

Moreover, a top-rate GST can deal a big blow to crypto trading activity by pushing them off-radar.

Digital tokens have been hailed as ‘e-gold’ of the information age. They are prized for scarcity and also portrayed as an inflation hedge. Hence, it should not suffer punitive taxes.

What is the way forward?

Profits on sale of Crypto coins must be held liable to capital-gains tax, as is currently the case.

Perhaps a stiff tax will nudge people to invest in stuff that’s designed to play an active role in the expansion of our economy.

Govt should spell out its stance at the earliest and enact a law to govern these digital creations.

Source: This post is based on the article “Heavy taxes are fine for quasi-assets like crypto” published in Livemint on 22nd Mar 22.