India passes Crypto Tax Law, what are the direct impacts to the Crypto industry in the country

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Lok Sabha on Friday, 25th March, passed the Finance Bill containing the taxation on Cryptocurrencies or Virtual Digital Assets “VDAs”. The strict amendments proposed by the Indian government were also approved, under what is now known as “Crypto Tax”.

Since the last few weeks, the crypto industry in India has been requesting a few amendments for the Digital assets through various means like Change.org and Twitter to make it less regressive for the investors. But the Government’s stance is clear, the law is made in such a way that it discourages crypto adoption in the country. Following are the major laws that were passed in this year’s Finance Bill relating to Crypto and Digital Assets:

  1. A flat 30% tax is to be paid on any kind of profits made from Crypto or any other digital assets.

    So, there is no slab according to income, it doesn’t matter which income class someone belongs to, all kinds of profit will be taxed at flat 30%.
Image Credits: incometaxindia.gov.in
  1. Losses from Virtual Digital Assets cannot be offset with any other type of income, not even any other digital asset.

This means that if you make profits on one virtual digital asset, and loss on another, the tax has to be paid on complete profit, no matter the amount of loss in another VDA. Adding to this, you cannot offset the acquisition cost of mining as well, i.e., if you are a crypto miner, then the cost of acquiring a graphics card and even the electricity costs, cannot be offset, the miners will have to pay 30% tax on the complete amount.

  1. 1% TDS to be paid on all VDA transactions beyond Rs. 10,000 a year.

This will be imposed from July this year. According to the government, this is required for getting information on all the transactions. It means that on buying and selling of each virtual digital asset, 1% TDS will automatically be deducted/locked by the exchange itself, and the exchange will be required to notify the government on all these transactions. The threshold limit for TDS would be Rs. 50,000 a year.

It is to be noted that all the cryptocurrencies and non-fungible tokens are part of VDAs. According to the Indian government, VDA could be a code or number, or a token that can be transferred, stored, or traded electronically.

Image Credits: incometax.gov.in

The Government also indicated that it is currently working on regulating or banning cryptocurrencies in the coming future. The crypto bill was earlier listed in the winter budget 2021, but the same was not brought in. Instead, the government has now taxed the VDA space and is yet to decide whether to legalize or ban crypto completely.

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While discussing the amendments during the parliament meeting yesterday, there were a few concerns raised by the members indicating the regressive nature of the taxes for VDAs. Gaurav Gogoi (Deputy leader of the Indian National Congress in the Lok Sabha) highlighted that these new tax laws are discouraging in nature for acquiring/holding/trading crypto and virtual assets, the government still needs to be clear on how it plans on defining Crypto, as an asset or as something which is speculative. He also mentioned that looking at the extent to which Crypto has been adopted in India, and elsewhere around the world, the government should come out with a policy sooner rather than later, whether it be banned or legitimized. He also requested on using the learnings from regulations made by different countries like USA and Japan

The possible impact of the taxation:

As of now, it is clear that this is a very severe tax liability. First, it completely discourages trading, due to no offset of losses and 1% TDS. It also makes it extremely difficult for mining to be profitable. This leads to blockchain developers, entrepreneurs, and crypto traders being forced to think of instead immigrating to other countries with friendlier tax jurisdictions relating to Crypto and VDAs. Polygon and Mudrex being the notable examples of entrepreneurs setting their shops outside the country even though it is more expensive and requires them to immigrate.

The views of Sumit Gupta, founder of CoinDCX is similar:

Recently, US president Biden signed an executive order “Ensuring Responsible Development of Digital Assets”. The order recognizes that crypto is here to stay, and since the US has had the technological leadership for many years, it intends to remain a leader in this space as well, and so is taking steps to secure the same for the future. It is clear that the US wants to keep its technological leadership and so is open to letting its entrepreneurs and developers keep testing the new technology for successful application. Such positive outlooks on Crypto have been seen around the world, and if India intends in being able to embrace newer technologies, it needs to have a positive approach towards Blockchain and Crypto assets.

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As virtual digital assets are a very new instrument, it is very important for the Ministry of Finance to carefully treat them and ensure that these are not used for tax evasion and other illegal approaches. The tax laws currently passed are created such that trading in VDAs gets curtailed immediately. “No loss setoff” within the same asset sound a little irrational and I wish that at least this part is reviewed and removed with immediate effect.

I personally feel these proposals were drafted in a hurry, but I am still optimistic that our government and the entities involved will quickly bring in proper regulation with respect to facilitating investment and trading in this asset class and also embracing the positives of this new technology.

I would like to reiterate my views about the future of Virtual Digital Assets as an alternate investment instrument for the creation of wealth if it is regulated well. I also believe that India has the potential to make wonders if it can successfully embrace Blockchain and its real-world applications, if it becomes a crypto hub and if it allows its entrepreneurs to explore.

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