“A lot of people trade in certain cryptos that come overnight and die down after a boom happens. That kind of speculative trading will definitely get affected now,” Shashi Mathews, a partner at Induslaw, told Moneycontrol. “You can probably say that this move is to avoid speculative trading because the government is worried about leakage of revenue and also protecting the general public from falling prey to any scams.”
According to Mathews, the government is currently ironing out its own position on the legality of cryptocurrency. The Reserve Bank of India has repeatedly expressed its reservations against such assets. Crypto tax provisions have already come into effect and this is the natural progression before a crypto bill is introduced in parliament, he said.
Industry reservations
The government said March 21 that losses from the transfer of virtual digital assets cannot be set off against gains from another and neither could mining costs be treated as acquisition cost for tax deduction purposes.
Leading cryptocurrency players called the clarification regressive in nature.
“This is detrimental for India’s crypto industry and the millions who have invested in this emerging asset class,” said Ashish Singhal, cofounder of CoinSwitch, a crypto exchange. “We fear the lack of provisions to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of the tax.”
He said the Union Budget for FY23 had recognised virtual digital assets as an emerging asset class and the natural course of action would have been to progressively bring in regulations at par with other asset classes. Instead, with this clarification, a step backwards has been taken, he said.
“If a regressive provision such as this would have been applicable to equities, it would have discouraged retail investors from participating,” Singhal said.
WazirX cofounder Nishcal Shetty said the latest clarification was an unfortunate way to look at new technology and said he hoped the government would change its position on the matter.
“Discouraging Crypto = Discouraging Innovation. This is one of the top reasons why countries around the world are taking cautious steps in Crypto taxation. Hope Indian Government hears the youth and ensures that Indian Crypto industry remains competitive,” Shetty posted on Twitter.
Gaurav Dahake, founder of Bitbns, a crypto trading platform, told Moneycontrol that while the latest clarification will result in a short-term bump in crypto transactions as traders settle their existing positions, the overall transaction volumes will likely fall by 30-40 percent.
Market players will likely create a type of synthetic asset or a combination of multiple coins that incorporate the guidelines. However, the clarification will have a major impact on transaction volumes in the next few months.
“Our entire message to the government is that it needs to be clear in its approach. Currently, it seems that the government wants to sort of trample on, suffocate the industry. This sort of direction is also coming across from the RBI, which already tried doing this earlier with a sort of ban in 2018,” Dahake said.
He claimed that excessive taxation by the government will lead to crypto investors moving out of India.
“Already, 25 percent of the people who are actively involved in crypto trading are setting up companies abroad,” he said, adding that this rate may rise rapidly.
Consolidation ahead
Cryptocurrency trading in India gained traction after the Covid-19 pandemic, experts said, adding that this coincided with higher retail investor participation in the equity markets. WazirX, India’s biggest cryptocurrency exchange and an affiliate of the giant crypto exchange Binance, registered annual trading volumes of over $43 billion in 2021.
Bitcoin breaching the $65,000 level in February, April and November attracted more investors to invest in this asset class. However, as cryptocurrency trading picked up in India, rumours started about the legalisation of such virtual digital assets.
The RBI repeatedly cautioned against usage of such assets, claiming they have the potential to disrupt the Indian financial system and curb the regulator’s power in adjusting interest rates. In a post-monetary policy media interaction on February 10, RBI governor Shaktikanta Das said that investors should know that cryptocurrencies do not have any underlying asset, not even a tulip.
The government, in the budget, proposed that income from the transfer of any virtual digital asset be taxed at 30 percent. No deduction of any expenditure or allowance will be allowed while computing such income except the cost of acquisition. Any loss from the transfer of virtual digital assets cannot be set off against any other income, the government proposed.
With a 30 percent tax rate and increasing regulation of the crypto space, experts said it is likely that consolidation will occur, with only the bigger players able to comply with all guidelines.
“It is a direct hit (30 percent tax) to the profit, so obviously every investor will have to re-strategise. Is the market worth investing anymore? It may not seem lucrative anymore from a pure play speculative basis. This is what we call prohibitive taxing. It is a very high rate of tax. It sends a message from the government that you should not get into this from a speculative and risk perspective and until a framework is built for protecting investors and traders,” Mathews said.
