Budget 2022: Crypto gets a backdoor entry in India

On February 1, while announcing the Budget 2022, Finance Minister Nirmala Sithraman announced something that was totally unexpected. Sithraman said income from 'virtual assets' will be taxed at 30% and one percent TDS (tax deducted at source) will be deducted on these investments. The government defines virtual assets as any instrument, generated through cryptographic means providing a digital representation. In simple words, it includes all private crypto currencies.

True, the 30% taxation is punitive tax, a harsh levy that could discourage many in dealing in such assets. But, for an industry which was fearing a countrywide ban at one point, permission to exist even with a punitive tax rate is a blessing. The bigger takeaway from Sitharaman’s Budget statement is not the rate of tax but the fact that crypto assets have finally got recognition in India. By recognising crypto as a taxable asset, the government has acknowledged its existence along with other virtual assets. The legality of the crypto assets can still be debated. But logically how can a government tax something that is illegal?

Secondly, by doing so, the government has also ignored the repeated public warnings by the RBI on crypto assets. To understand this point, let’s first look at why the RBI was opposing crypto in the first place.

In the Financial Stability Report (FSR) released on December 29, the RBI highlighted several concerns on private cryptocurrencies. It said these instruments pose immediate risks to customer protection and anti-money laundering (AML) and combating the financing of terrorism (CFT).

“They are also prone to frauds and to extreme price volatility, given their highly speculative nature. Longer-term concerns relate to capital flow management, financial and macro-economic stability, monetary policy transmission and currency substitution," the report said.

Not just that, the proliferation of private cryptocurrencies across the globe has sensitised regulators and governments to the associated risks, the FSR report said. The report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the financial system.

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“New illicit financing typologies continue to emerge, including the increasing use of virtual-to-virtual layering schemes that attempt to further muddy transactions in a comparatively easy, cheap and anonymous manner,” the FSR report noted. The aggregate market capitalisation of the top 100 cryptocurrencies has reached $2.8 trillion in the emerging market economies that are subject to capital controls, and free accessibility of crypto assets to residents can undermine their capital regulation framework, the report said.

Now, the question is how does the Indian Government ensure that the above mentioned risks associated with private crypto currencies, highlighted by the central bank’s report, do not manifest just by taxing it at a higher rate? Isn’t it leaving the field open to the crypto lobby to transact freely only on the condition that a certain tax rate needs to be paid?

The fact is the crux of the RBI’s concerns that crypto assets can be used or illegal activities and muddy transactions remain. Just making the instrument taxable doesn’t change anything about the crypto risks.

As expected, the crypto lobby has hailed the taxation announcement as government legalising crypto assets saying that the confusion has been cleared on the nature of crypto transactions.

The Crypto Bill, which is still pending, was supposed to bring the much-needed clarity on cryptocurrency’s legal status in India. But, even before bring a proper law, the government’s decision to treat private virtual assets as a taxable asset class gives the much-needed assurance to the crypto lobby that the government is not going to ban cryptocurrency in India. In other words, crypto has already got a backdoor entry in India.