Bridging the GST gap for virtual digital assets

India's Goods and Services Tax (GST) has reached a significant eight-year milestone on July 1, 2025. Over this period, it has matured significantly into a comprehensive indirect tax system, backed by a digital structure and a cooperative federal framework. But as India moves deeper into the digital economy, GST’s current structure has started to show its limitations, especially in its approach to the fast-growing and complex universe of Virtual Digital Assets (VDAs).

While VDAs such as cryptocurrencies, Non-Fungible Tokens (NFTs), stablecoins, and tokenised assets have found rising adoption both globally and domestically. Yet, their treatment under the GST framework in India remains ambiguous. In 2022, the government introduced a flat 30% tax on income from VDAs and a 1% TDS on transfers. However, from an indirect tax standpoint, the sector continues to operate in a regulatory vacuum.

GST’s current approach to VDAs

As it stands, only services associated with VDAs, exchange platform fees, and brokerage, are taxed under GST at the standard rate of 18%. The assets themselves, whether traded, held as investments, or used in transitions, are not directly taxed because they are not clearly defined as goods, services, securities, or actionable claims.

This lack of classification leads to significant compliance uncertainty. For instance, if an NFT represents a digital artwork, should it be taxed as a good or as a licensed service? Is it a token issued via an initial coin offering (ICO) exempt as security, or taxable as a digital product? In barter transactions, where crypto is used as payment, how should fair value be determined? The absence of definitive answers raises the risk of over-taxation, disputes, and potential revenue leakage.

GST Council’s dilemma on digital assets

Recognising these gaps, the GST Council has initiated discussion on better integrating VDAs within the existing framework. A critical area under review is whether VDAs should be categorised as goods, services, or intangible assets. This decision is crucial to ensure consistency in taxation and reporting.

The Council is also evaluating whether the crypto exchanges and digital platforms should be recognised as suppliers under the GST law. This would have direct implications on how service charges, brokerage fees, and platform commissions are treated and charged. Additionally, there is growing agreement on implementing a reverse charge mechanism (RCM) for services availed from foreign virtual asset service providers (VASPs), especially where direct tax collection is impractical.

Further complexity arises with newer crypto applications such as decentralised finance (DeFi) Staking and tokenisation. Each of these has distinct use cases and tax implications, yet formal notifications or policy frameworks have not yet been issued. As a result, businesses and tax professionals continue to operate in a zone of legal ambiguity.

Why regulatory clarity is critical?

The challenges extend well beyond definitions. One of the most pressing issues is valuation. In peer-to-peer or decentralised transactions, the absence of a standardised or benchmark price complicates GST Computation.

Establishing a uniform valuation approach, like using a weighted average price from registered exchanges, would bring predictability and reduce disputes.

Jurisdictional issues also pose a significant challenge. GST is a destination-based tax, but blockchain transactions are inherently borderless. With nodes, wallets, and smart contracts functioning globally, identifying the place of supply becomes problematic. Without blockchain-aware rules that incorporate IP geolocation, wallet KYC data, or transaction provenance, it is difficult to determine which state or authority is entitled to tax a given transaction.

Input Tax credit (ITC) eligibility is another grey area. Without much clarity on what constitutes legitimate input tax for VDA-related activities and whether ITC is available for GST paid on the acquisition of VDAs or related services, businesses may face cascading tax liabilities on legitimate business expenses, ultimately hindering innovation in the sector.

The global tax playbook for VDAs

Globally, tax authorities are adapting to digital assets in different ways. The European Union exempts crypto used for payments from VAT but taxes related services such as exchange operations and NFT issuance. Singapore offers GST exemption for digital payment tokens when used as currency, but taxes ancillary services like platform fees. Australia treats crypto as property; hence, GST only applies when crypto is exchanged for goods or services, but not when simply bought or sold as an investment. Canada classifies crypto as financial instruments, and its sale or exchange is subject to GST when part of a commercial transaction. In the UK as well, crypto is viewed as a medium of exchange generally exempt from VAT, with VAT applying only to associated services.

A common thread across these jurisdictions is the preference to tax services around digital assets rather than the assets themselves. India can learn from this service-centric approach. Additionally, international initiatives like the OECD’s Crypto-Asset Reporting Framework (CARF) offer templates for harmonising digital asset reporting and tax treatment, and India would greatly benefit from aligning with such global standards.

A framework for the future

To stay ahead, India must adopt a future-looking GST framework that embraces the digital asset economy. The first step is to define VDAs clearly under GST law, distinguishing between payment tokens, utility tokens, security tokens, and NFTs based on their economic characteristics. This classification will ensure consistency across tax assessments.

The regime should focus on taxing services related to VDAs, like platform usage, brokerage, wallet services, and advisory fees, while exempting the holding transfer of VDAs when used as currency or long-term investments. This principle is already in use in several developed jurisdictions and would reduce litigation risk and support innovation.

Valuation norms must be introduced to price volatile assets fairly, potentially by referencing average prices across registered exchanges over a specific timeframe. Blockchain-aware place-of-supply rules are essential to resolve jurisdictional ambiguity, using tools like IP addresses or KYC-linked wallet data to assign GST liability.

Implementing a reverse charge mechanism for foreign VASP services would help secure tax revenue where direct taxation is unfeasible. At the same time, explicit guidance on ITC eligibility for expenses related to crypto businesses, such as technology, consulting, and marketing, should be issued to avoid confusion and cascading tax.

It is equally important to harmonise GST rules with income tax provisions to ensure cohesive treatment across India’s broader tax architecture. Finally, proactive guidance on emerging areas like DeFi, staking, asset allocation, and metaverse transactions will help the law keep pace with rapid innovations.

The article was featured on CNBC TV-18 on 1 july 2025. Read here