The Government of India’s concerns over cryptocurrencies have been growing, which it primarily attributes to terror-financing and money-laundering. This has been a consistent position on the government and the point of view of the Reserve Bank of India’s.
However, despite the ongoing ‘ban crypto’ narrative set by the RBI, the government has decided to levy taxes on virtual digital assets (VDAs) including cryptocurrencies and non-fungible tokens. As per Budget 2022, capital gains derived from crypto assets will be taxed at 30 per cent, regardless of under which tax slab the taxpayer comes under.
Furthermore, the losses incurred from one digital currency cannot be offset by gains from another, and no deferment of losses to future years is accepted. However, the final step to this taxation overload was a 1 per cent tax deducted at source (TDS) applied to each transaction/trade made on a VDA. This caused a huge drop in the volumes in VDA trading in the Indian cryptocurrency industry, with trading volumes on the domestic exchanges decreasing by almost 97 per cent.
The implementation of the ongoing TDS rate has forced crypto asset traders to transfer activity overseas, which invariably leads talent in the field migrating overseas. We can still stem the flow, and even attract talent back to India if there is some semblance of reprieve in the upcoming Budget 2023.
Web 3 Diaspora
Despite the fall in trading volumes on Indian cryptocurrency exchanges, the interest among young investors for the Web 3.0 space has only gone up in the past year. At a recent Web 3.0 developer-oriented event in Bengaluru, Karnataka, we noted over 400 new project submissions with a participation of over 20,000 people from across the world. This only shows that the government has misread the zeal and commitment of the Indian Web 3.0 startup ecosystem.
The government must involve those working in the Web3/crypto/VDA industry and work in conjunction with them to create a beneficial atmosphere for the growth. India has the second-largest blockchain developers in the world and we have the potential of creating world-class products from within India. Let us not limit ourselves to being a service provider. The government must consult industry and facilitate the building of a self-sustaining industry with relevant and forward-looking laws.
The current regulatory system is insufficient for the Web 3.0 industry. We need a Web 3.0-focussed regulatory body that is responsible for the oversight needed in the VDA markets. Current financial oversight laws may not serve the purpose for VDAs, but the best practices from other bodies can translate to this space.
A new Web3/VDA regulation must be created in a sandbox mode that enables rules that allow a business to function in a controlled environment. In a controlled environment we can build important practical applications, rules of use, encourage experiments, omit outside influences, and build scalable and rapidly executable business models. This is the best way to enable quick innovation.
Build an Industry-Government Combo
India has a wealth of promising talent making their mark in the world of VDAs, metaverse, blockchain technology, decentralised finance, and more. In the upcoming Budget, Finance Minister Nirmala Sitharaman could propose to regulate the industry — by forming a committee of professionals well-versed in the field, along with progressive bureaucrats and government officials. This committee could be instructed to draft laws, develop new policies, and collaborate with industry to boost the emergence of these innovative technologies in India.
It has been about a year since the taxes of VDAs kicked in, and while it was a step in the right direction, it can be more inclusive in its approach. It is time to reduce the tax burden and implement regulations to bring in more clarity and oversight. The sandbox approach mentioned above can be useful here.
A reduction in taxes with more oversight will enhance tax collection as the traders who sat out of the trading in the past year will jump back in and add to the exchequer’s coffers. Last year, as per reports, around Rs 60 crore was collected as TDS from the crypto trade transactions. With over 5 million traders, this number could have been much higher.
The Right Impetus
India has immense potential to be a leader in the field of digital asset management. To give this sector the necessary boost, the upcoming Budget must provide the right impetus to this space. We urge for the establishment of a governing organisation to help further the development of this sector and make regulations to ensure the optimal, equitable, and responsible use of the technology. It is imperative that the government recognises and supports this technology and pave the way for greater innovation and development, ultimately driving India’s economic growth.
(Lokesh Rao, Co-Founder & CEO, Trace Network Labs.)
(The views expressed are the author’s own. They do not necessarily reflect the views of DH.)