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Union Budget 2022: India’s Baby Steps On Crypto Regulation?

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Finance minister Nirmala Sitharaman presented the union budget in Parliament on 1st February 2022. .

The first-ever paperless budget proposes several initiatives, including the new crypto tax that could be considered the next step towards digitization and embracing the upcoming era of web3-powered digital evolution.

The past two years have seen India move towards digitization at an accelerated pace as crypto adoption rose to unprecedented numbers at the pan India level despite the regulatory uncertainties.

The much-anticipated crypto bill missed the parliament threshold twice last year, and the industry was left in limbo with the threat of a possible ban looming over the multi-billion-dollar crypto industry.

The 2022 Union Budget brings in a mixed bag of respite and reverie for the crypto industry.

Here’s what the budgetary provisions imply for the crypto industry.

What does the budget propose?

First and foremost, the RBI will issue a digital rupee in the financial year 2022-2023. Besides that, the Union budget proposes several provisions pertaining to tax liabilities of digital assets, cryptocurrencies in particular.

1. First and foremost, anyone holding cryptocurrencies would be required to report their gains or losses from the digital assets as a part of their income.

2. Income from digital assets would be taxable at a flat 30% rate irrespective of short or long-term investment, while no deduction will be allowed beyond the cost of acquisition.

3. A 1% TDS will be deducted beyond a specific threshold.

4. If a person gifts digital assets or cryptos to anyone, the tax will be deducted at the recipient’s end. This provision also includes transferring digital assets from one wallet to another owned by two different individuals.

5. Also, the losses from such virtual asset investments cannot be offset against any other income.

The budget also throws light on what a ‘digital asset’ constitutes. A digital asset will include ‘any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means.’ Further, the digital asset may be ‘exchanged with or without consideration.’ Also, NFTs and digital assets of similar nature, including those related to the metaverse, digital currencies, and tokens, may fall in the same tax ambit. While we wait for more details to come in after studying the fine print to give an overview of how this would impact the budding crypto industry in India.

What does the crypto industry have to say about the current tax provisions?

While retail crypto investors now have an idea of what to expect from the government on the taxation front, I believe the industry will have mixed views. However, the tax clarity is a progressive move. The Union Budget 2022 has set the stage for a progressive India that will mindfully solve the current challenges to reach our climate, health, economic, and infrastructure goals to achieve the $ 5 Trillion economy target. Moreover, it’s a massive step towards enhancing the overall digitization and blockchain evolution and adoption in India and introducing CBDCs to improve digital transaction efficiency and transparency through blockchain adoption.

Our FM's acceptance of digital virtual assets may boost confidence in retail investors and banks who hesitated to participate in building with crypto. With this progress, we have the necessary motivation and capabilities to develop a sustainable infrastructure and put resources in place to upskill India on crypto and blockchain education. We hope to create more growth opportunities for everyone to access and exercise this freedom to participate in crypto.

The crypto industry will likely see more conventional players enter the scene in the coming years, but the new crypto tax could also discourage retail investors - those who can invest only small amounts such as Rs 100 or even Rs 1000 will be taxed fairly quickly and in large amounts relative to their financial capacity. The 30% tax on capital gains is amongst the highest for capital gains, while the restriction on offsetting and no deductions for transactional expenses don’t match with the existing principles of taxing business income or capital gains.

Moreover, the tax provisions are in line with taxation on gambling. The 1% TDS levied is more towards monitoring crypto transactions and could lead to several complexities - as buyers may need to deduct a 1% TDS on every purchase. Since TDS adjustments are made on an annual basis during the time of ITR filings, we may see liquidity drying up from the market as every purchase could result in a TDS deposit. If crypto exchanges are tasked with enforcing this policy, they have to implement this at scale, and individuals might face privacy concerns. Other emerging markets have taken a different approach - Thailand even retracted its 15% capital gains tax on cryptocurrencies after the policy received backlash.

Is the budget embracing crypto or impeding adoption across the industry? Time will tell.

Abhishek Rastogi, Partner at Khaitan & Co., says, “The taxing provisions on digital assets appear to be a little tough as the gifts concerning digital assets are proposed to be taxed. Further, not giving any deduction concerning transactions where there is a loss of digital asset may be subject to constitutional challenge.”

The taxation move could be considered a great leap of faith by the Indian government which was considering a blanket ban two years back. Despite the almost punitive stance, the industry is optimistic about India being a part of the global crypto revolution early on and the positive impact cryptos and blockchain will have on the job market and the state of the economy at large.

All in all, the Union budget 2022 is at least a start, and we can hope to expect further clarity and favored stance from the government!

-by Medha B Dey Roy,PR and Public Policy Manager, WazirX

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