Budget 2022: India's answer to crypto is 30% tax

Going in the Union Budget 2022, the expectations were high for almost all the sectors. However, the crypto fraternity was going in with bated breath, over the fears of the so-called “Crypto Tax”. The government did not disappoint; in fact, it went above and beyond. Not only has the government introduced taxation on capital gains on virtual digital assets, it also has introduced a cryptocurrency of its own, the “Digital Rupee”.

This step towards introducing steep taxes on the capital gains over crypto only adds to the strain on the industry, as the country’s regime becomes more and more hostile towards private cryptocurrencies. While it will introduce its own cryptocurrency, it will only push the competition out of India, which will effectively ensure a monopoly of the government on cryptocurrency.

Budget 2022 and The Tax on Cryptocurrencies

Presenting her 4^th straight budget, the Finance Minister Nirmala Sitharaman said, “There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime”.

“Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent”. This means that all the transactions in cryptocurrencies, NFTs, and all other digital assets, and the resulting capital gains from it, will be the subject of taxation.

For capital gains, the government will charge a 30% tax, and for all transactions, a 1% TDS will be deductible. However, the government has not yet specified a cap for the TDS, so it is safe to assume that it applies for all sizes of crypto transactions. “Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to 24 transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold,” Sitharaman said.

Moreover, the government will also charge a tax for any gifts of virtual digital assets. The tax slab has not been specified yet, however. The finance minister said, “Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient”.

Of course, taxation of digital assets and the capital gains resulting from the same is a step in the right direction for legitimizing crypto trade in India, and initial reactions have backed that sentiment. “Hope to see a reduction of crypto ban fear in India. India just taxed crypto. Lot to unpack here but overall this is a very positive step forward for crypto ecosystem in India,” tweetED Nischal Shetty, Founder and CEO, WazirX.

However, for a start, the tax seems very steep. India’s crypto scene is rather infantile, and the government has been wishy-washy in fleshing out a proper framework for the same. Right now, it seems as though the government does not really want to support crypto, and why would it; it has other plans.

Digital Rupee – India’s Answer to Cryptocurrency

The Finance Minister has officially announced “Digital Rupee”, a digital currency based on blockchain and other technologies. “Introduction of Central Bank Digital Currency (CBDC) will give a big boost to digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23,” Sitharaman said.

For all its worth, the value of the Digital Rupee will be the same as that of the Indian Rupee. The Reserve Bank of India will issue the Digital Rupee as well, as it issues the actual banknotes. Therefore, the Digital Rupee will become India’s own version of a CBDC, and India becomes one of the first countries to take the step. However, this represents a steep change in the stance of the RBI and the government towards cryptocurrencies.

Indian banks had raised concerns over the private cryptocurrencies, saying that they might cause financial instability, and in the light of that, the government had effectively all private cryptocurrencies, with the RBI asking the banks to not facilitate the same. Since 2018, the Reserve Bank has asked for a complete ban on crypto, yet, it will introduce its own. The sense of irony is not lost on anyone.

Conflicting Reactions

The industry’s early reactions are as what anyone would have expected: divisive. While some are calling it a positive development for the crypto landscape in India, others have called it a “crackdown”.

“A standardized 30% tax treatment is welcome though we await the details on what is a taxable event and what is the threshold for 1% TDS deduction. We do hope that the Government will give exchanges and other businesses a certain time period to enable the tech behind TDS deduction and bookkeeping. Offsetting and carry forwarding losses have worked well in other countries but we are happy to see a consideration given to all such instances”, Vikram Subburaj, CEO, Giottus Crypto Exchange, said, welcoming the decision to tax all capital gains on cryptocurrency transactions. He added, “Overall, we believe that the ecosystem along with its businesses and investors are primed for growth in the upcoming future. The Government, we believe, has already laid the foundation for a future thriving and sustaining industry”.

 “The Government has declared its intent to go after crypto currencies by introducing its own digital rupee and seeking to tax gains on sale of crypto currencies at the rate of 30%. Further to track down crypto gains a TDS of 1% has also been proposed whereby persons engaging in crypto trading will not be allowed to escape the tax net”, Anshuman Khanna, Director, ValPro, called out the government.

 “The FM refrained herself from pronouncing the word Cryptocurrency. While taxing secures income for Government but yet to secure the crypto investors from frauds and crimes. Also, Virtual digital assets need to defined in some law first or could have defined in the finance act 2022 by way of which budget is introduced,” Advocate (Dr.) Prashant Mali, a cyber-expert, said of the Government’s move. “I think this budget thought about income to government from crypto tax but forgot about Justice and grievance handling mechanism to crypto investors and other stake holders,” he added.

The crypto tax has divided opinions like nothing else. While the industry still unpacks the bombshell that has been dropped on them, this was a move that was in the works for a while.

Should The Government Be Taxing Crypto?

The short answer: yes. The crypto tax is something that helps keeps things in check, and allow the government to have an idea of the volume of transactions and the amount of capital gains coming from crypto. A policy framework for any type of business does entail taxation, and crypto should not be any different. What’s more, with taxation, the government becomes interested, and the sector can see growth.

However, the amount of tax the government is charging does not reflect that intent. A 30% tax on capital gains reflects the government’s intent to suppressing crypto ecosystem, rather than fostering it. Furthermore, the introduction of the CBDC has effectively brought a competitor to the market. While the government has not clarified it yet, assuming it will charge the same amount of tax on capital gains for Digital Rupee and other cryptocurrencies means that Digital Rupee has no leg to stand on, apart from being a government-owned crypto, which will lend it considerable stability.

If the government does offer a tax rebate on transactions under Digital Rupee, that would clarify its intent. However, till then, all we can do is wait and see where the government takes this.

The author is Hemant Kashyap, Telecom Journalist, CyberMedia.