Absurd, Harsh, Regressive: What crypto industry has to say on proposed taxation treatment

Cryptocurrency (Representative image )

Cryptocurrencies have always had a love-hate relationship with governments globally. The novelty of attaching a value to this asset that has no underlying value, coupled with the immense interest from people everywhere has made cryptos somewhat of a fearsome creature for some governments, while others have seen it as an opportunity.

On March 21, the Indian government clarified that losses incurred in the transfer of one VDA (virtual digital assets) i.e. crypto-assets cannot be set off against income generated against another VDA. Many experts and investors see this as one of those crucial moments just preceding the final act of hostility between India’s nascent crypto ecosystem and its government and a move that will prove detrimental for the industry.

In response to queries posed by MP Karti P Chidambaram, MoS Finance Pankaj Chaudhary answered that “As per the provisions of the proposed section 115BBH to the Income Tax Act, 1961, loss from the transfer of VDA will not be set off against the income arising from transfer of another VDA."

After years of discussions, there is still ambiguity regarding an official Bill to regulate the sector. If the long wait for clarity was not enough, the government slapped a 30 percent tax on gains from cryptocurrencies effective from April 1, 2023, as part of budgetary announcements this year. Additionally, a 1 percent TDS (tax deducted at source) will also be levied to ensure compliance with KYC norms.

This also comes after the government was debating the classification of cryptocurrencies under the GST regime which would mean that the tax, which currently stands at 18 percent and is levied only on financial services offered by crypto exchanges, would also be applicable to the whole value of your crypto transaction.

Vikram Subburaj, the CEO, of Giottus Crypto Exchange, thinks this would be tough, though. While he welcomes the ensuing clarity on government stance on crypto, it would be “tough to blanket define all offerings in the VDA space as either goods or services. We believe that an incremental approach to classifying and defining GST laws for VDAs is the way forward that allows for flexibility as products evolve in the space”.

Setting off the setting off

Let's unravel this. Suppose you trade in token A, which earns you Rs 100 as profit. But another of your trades on Token B cause you a loss of Rs 40. A cursory glance would suggest that you’re net position i.e. that of Rs 60 is still one of gain. But not per the government.

So, in addition to paying 30 percent i.e. Rs 30 as a tax on your profit on Token A, you cannot set off the loss of Rs 40 you’ve incurred on the trade of Token B against what you’ve earned on trading token A. That means you’re left with a net profit of Rs 70 on token A and a loss of Rs 40 on token B.

Harsh? Bhagaban Behera, CEO, and Co-Founder of Defy seems to think so. “Not being able to offset the losses of one virtual digital asset with another will discourage a lot of investors as it increases their risk and decreases the end reward. This would disincentivize them from trading with Indian exchanges and deal only with foreign exchanges or decentralized exchanges”.

“The proposed tax framework on digital assets would lead to a decline of the blockchain industry in India and talent and companies would eventually move outside”, he continued.

L Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys concurred. “We believe that the budget amendment is set to trigger a sell-off in the remaining financial year and taxation of such income during this period would continue to be a dilemma before the investors”, he said.

But, here’s the caveat. The parliamentary notification yesterday is not the final word, rather a proposal awaiting clearance and will be implemented only when approved by the parliament. Some respite? Not if you are engaged in crypto mining.

Mining Woes

While it is important to note that India does not feature very high on the global crypto mining list, it is not uncommon to find many isolated yet sprawling mining ecosystems in various parts of the country.

And adding to the miseries of such crypto miners, the notification yesterday also spelled out a death knell for miners by stating that “Infrastructure costs incurred in the mining of VDA (eg. crypto assets) will not be treated as a cost of acquisition as the same will be in the nature of capital expenditure which is not allowable as a deduction”.

This means that if you own crypto mining infrastructure, you will not be able to claim deductions or tax rebates for the same under the proposed tax structure. And that has enraged many of the likes of Prakash Taank, who employs over 20 people as miners in his facility located in the distant locales of Chattisgarh, India.

“We pay our due of import duty on the order of mining rigs and lakhs of rupees worth of electricity bills, alongside generating employment. And yet, the government is bent on destroying our business. This will only force people to move abroad in search of greener crypto pastures”, he observed.

India features closer to the higher end of the global electricity tariff spectrum, charging significantly higher than countries like Uzbekistan and Kazakhstan, making them favorable destinations for crypto mining.

Still, Ludhiana-based CA Bhavesh Jindal, who specializes in taxation affairs, thinks this parliamentary proposal on mining is absurd, since it completely rules out the possibility of any kind of crypto mining taking place in India.

"It only means that the government’s stand is clear-to not promote cryptocurrencies in India, come what may”, he signed off.