The worldwide adoption of cryptocurrencies has led more Indian service providers to accept foreign payments through digital currencies instead of conventional foreign exchange. The Indian tax system fails to identify cryptocurrency as foreign currency which creates major problems for GST and tax compliance.
LUT and GST Implications:
The Letter of Undertaking (LUT) enables Indian service exporters to supply their services without GST when they receive payments in convertible foreign exchange. The Indian tax system does not recognize cryptocurrency as foreign currency so payments made in crypto do not qualify for LUT benefits. The Indian government requires an 18% GST payment for all services exported through cryptocurrency transactions.
Your bank account receives INR funds from local crypto traders after cryptocurrency conversion but the tax system treats these funds as VDA sales instead of foreign exchange remittances. The conversion process between cryptocurrency and INR through local traders creates a transaction that falls outside the LUT regulations.
Income Tax Treatment:
Service revenue earned through cryptocurrency payments must be reported as regular business income for tax purposes. The Income Tax Act Section 115BBH imposes a flat 30% tax on cryptocurrency transactions regardless of their duration or other income categories. The following essential points must be understood:
The law prohibits any tax deductions except for the initial purchase price.
The law prohibits cryptocurrency transfer losses from being used to offset other forms of income or from being carried forward to future years.
The Section 194S tax law requires a 1% TDS payment on all crypto transactions that exceed specific threshold amounts.
Challenges and Planning:
The combination of 18% GST and 30% flat tax and TDS requirements leads to substantial reduction in net earnings from cryptocurrency-based transactions. The following strategies help businesses minimize their tax burden:
Your business should establish an overseas entity to handle cryptocurrency payments from abroad.
The process of converting cryptocurrency abroad followed by foreign exchange remittance to India enables businesses to use LUT benefits.
The regulatory environment requires businesses to maintain complete documentation because GST and Income Tax and FEMA laws actively monitor their activities.
Conclusion:
The Indian tax system does not grant LUT or GST exemptions to service providers who receive payments in cryptocurrency for their export activities. Service providers must follow GST rules at 18% and Income Tax regulations and Virtual Digital Asset TDS requirements. The complex legal framework requires businesses to seek professional tax and legal advice for both tax compliance and maximum tax benefit achievement.
Practical Illustration:
In practice, this means that a freelance designer, software developer or consultant in India who accepts payment in Bitcoin, USDT or any other cryptocurrency is not treated in the same way as an exporter who receives payment through SWIFT, wire transfer or traditional forex channels. Even though the end result may be that the person ultimately receives INR in their Indian bank account, the tax departments look at the structure of the transaction rather than the commercial intention of the parties.
Key Takeaways for Businesses:
Service providers who are planning to scale their operations or deal with multiple international clients should carefully evaluate whether direct cryptocurrency receipts in India are commercially viable after considering GST, income tax, TDS and compliance costs. Where possible, professional advice should be taken in advance so that contracts, invoices and payment channels are structured in a way that protects both profitability and long-term regulatory compliance.