In February, Indian Finance Minister Nirmala Sitharaman made a tax proposal to bring the unregulated digital asset space under tax authorities.
The proposal includes a 30% tax on crypto returns, and a 1% tax deducted from source (TDS), by crypto exchanges for transactions above 10,000 Indian rupees ($133).
The announcement was made during the parliamentary budget session 2022. The government has already set April 1, 2019, as the deadline for crypto exchanges that must comply with the new tax regulations.
The introduction of the crypto-tax was widely misreported as a legal recognition of cryptocurrencies by India — , a notion that was later debunked in the country’s Central Board of Direct Taxes.
Sitharaman reiterated a similar position to Parliament a few more days later. He claimed that the government will only tax digital assets’ profits and not give them legal recognition. After appropriate legislation is introduced in Parliament, the legality of crypto markets will be decided.
“Banning or not will be decided after the consultation has been completed. However, if you don’t want me to tax the profits and not tax them, I will.
“I will tax because it is sovereign right to tax.”
-FM Nirmala Sitharaman on Crypto pic.twitter.com/VUSmaODR7Z
— Crypto India (@CryptooIndia).
February 11, 2022
30% Crypto tax would do more harm that good
The country’s highest crypto tax bracket is 30%. It is almost double the corporate tax rate at 16%. The announcement received mixed reactions from the Indian crypto community. Some exchanges praised it as a positive step towards some recognition of the unregulated cryptocurrency market. Others called it regressive.
Representatives of Indian crypto-exchanges met with senior policymakers from Ministry of Finance to appeal against the government and ask them to reconsider the proposed tax rules.
According to The Economic Times industry leaders tried to explain to The Economic Times that a 1% TDS could discourage small traders and lead to assets shifting abroad. Representatives also discussed how difficult it would have been to collect TDS on foreign exchange transactions without any data. Discussions at the meeting revealed many challenges in implementing tax without clear regulations.
Despite the government’s insistence that taxation does NOT constitute legal recognition of cryptocurrency, Sumit Gupta (co-founder and CEO of Indian crypto platform CoinDCX) told Cointelegraph that the proposal was a landmark step that gives digital asset markets greater legitimacy. Gupta spoke out about the tax bracket’s inherent complexity and high tax rate.
“There have been discussions about the 30% taxation figures. Some suggest that it is a large percentage bracket that could deter greater innovation in this sector and serve as an obstacle to investors and users of digital finance.”
He said, “Besides the high rate of tax, there are still gaps and confusion, especially when it is tax deductible at source.” Certain sections regarding TDS are unclear, which is limiting crypto’s adoption. Although progress has been made in crypto, it is only the beginning. We look forward to more regulatory developments that will help finance grow and thrive in the future.
Some claim that the tax proposal was made haphazardly. The government wanted to tax the profits and leave the trader with the losses. The market could become dominated by the wealthy and discourage small traders further.
Cointelegraph spoke with Siddharth Sogai, founder and CEO at Crebaco, a blockchain data analytics company.
This tax structure indirectly discourages anyone from entering crypto. A 30% tax, 1% TDS and goods and services tax (18%) are levied on each transaction (on brokerage/service fees). This is not only costly but also very difficult to follow as there are thousands of transactions per month in crypto. Before the announcement of this framework, many had paid taxes from income other than the one that was payable. Any losses were carried forward. A bear market in crypto can last for several years. Therefore, losses (if any), should be allowed to be carried forward.
Retail traders have already reacted strongly to high taxation in several countries around the world. South Korea had to postpone their 20% crypto tax proposal because of a lack in clarity in regulations. Thailand had to cancel the 15% tax proposal after receiving backlash from retail traders. To create a balanced framework, the Indian government would be wise to take note of the changing regulations in the world.
WazirX CEO Nischal Shetty said that taxes are a positive approach. He spoke to Cointelegraph:
“India is finally on the right track to legitimize the crypto sector in India. It’s a great news story for everyone to read about the forward-looking approach of the GOI [Government of India] towards crypto while we discuss the finer details of the industry. We believe potential crypto investors who have been sitting on the fence are now ready to participate in crypto. The space’s pioneers are determined to create a favorable environment for crypto and are currently discussing the implications of the current tax system at the grassroots level.
Foreign investment could be discouraged by crypto taxes
Despite uncertainty surrounding crypto regulations over the past three years, the Indian crypto ecosystem has been able to thrive. Despite the fact the Indian government has yet not finalized a draft crypto bill for the country, foreign venture capital firms have been eyeing India’s vast market and its potential to be a major player in the ecosystem.
Over the past two years, several Indian crypto exchanges have become unicorns worth $1 billion or more. This has attracted investment from some the most prominent names on Wall Street. The recent complex tax policies could be a hindrance to their plans. Sogani explained:
“I received a call yesterday from one of the three largest crypto exchanges in the globe, who are interested in entering India. However, after yesterday’s announcement they seem to be rethinking their plans. Because of the complexity surrounding the taxation of cryptocurrency. A complicated tax structure will deter international companies from setting up operations and investing in India. India is a potential market for crypto because of the strength of our population.
TDS compliance and high taxes make it extremely difficult for exchanges and multinational companies to establish offices in India. Crebaco estimates that approximately 10,000 Indians are employed by crypto-focused companies and Indian exchanges. Indian coders are also receiving freelance opportunities from all over the world. Government policies, such as the new tax rules, are encouraging “brain drain.”
India’s crypto taxation rules are a paradox at this point. While crypto is recognized by the tax system, the government asserts that legal recognition can only be achieved if the appropriate laws are in place. India’s crypto traders and entrepreneurs have been made more complicated by the heavy tax on crypto holdings.