India’s Web3 Landscape Report 2023

This report explores GST implications associated with India's web3 landscape, focusing on the entire project lifecycle of a cryptocurrency, from token generation to final disposal.

• As there is lack of clarity on classification of cryptocurrencies as ‘good’ or ‘services’ under GST laws, there are several associated challenges in determining tax implications related to cryptocurrencies. While services provided by crypto exchanges are subject to 18 per cent GST, however there is no clarity around the value on which such tax would be imposed. Similarly, using cryptocurrencies for procurement of goods and services makes it difficult to ascertain the valuation for taxation purposes.
• GST implications vary depending upon transaction parties' locations, posing challenges in decentralised transactions like block rewards and Initial Coin Offerings (ICOs). Given the nature of cryptocurrencies, ascertaining the physical location is particularly complicated.
  
• Uncertainty also surrounds GST application on mining and staking rewards, as well as eligibility for input tax credit on cryptocurrency creation expenses. Various token distribution mechanisms, such as airdrops and pre-sales, require nuanced GST analysis, especially for transactions without consideration or involving loyalty points.
  

These complexities require a need for clarity and reform in regulatory frameworks, to ensure accurate tax assessment and compliance in cryptocurrency transactions within the evolving web3 environment.

The rise and popularity of VDA saw a surge in digital asset trading, prompting the government to introduce a new taxation scheme for VDAs effective 1 April 2022, adapting to the emerging market dynamics. Gains from VDA transfers are taxable at the highest tax bracket of 30 per cent, with more restricted deductions and loss set-off vis-à-vis other kinds of income. The Indian taxation framework, in addition to the already complex nature of VDAs, further creates significant challenges regarding the applicability and compliance requirements of VDAs. Tracking of transactions, tax implications on VDA barters, location of VDAs, applicability on offshore exchanges, characterization of VDA income are difficult in the absence of explicit guidance.

KPMG In India partnered with Hashed Emergent as Knowledge partner on India’s Web3 landscape Report 2023.