Budget expectations | Crypto sector hopes for revision in tax rates, parity with other assets, regulations

Crypto investors in India expect a more friendly tax regime for digital assets and parity with other assets and regulations when finance minister Nirmala Sitharaman tables the budget for FY24 in less than two months.

The crypto sector in India crashed this year with trading volumes on domestic exchanges plummeting about 90 percent as cryptocurrency prices fell and a new taxation policy was introduced for virtual digital assets (VDAs) in the FY23 budget.

Crypto was dubbed a sunrise sector in India in 2021 as prices rose and attracted users. At its peak, it was estimated that over 10 million Indians had invested almost $6 billion in crypto assets.

With the budget for FY24 coming up, investors are hoping the government will provide some relief to infuse fresh life into the struggling crypto sector.

Capital gains

Budget FY23 proposed that gains arising out of virtual digital assets or crypto assets be taxed at a flat rate of 30 percent. In addition, a 1 percent tax deducted at source (TDS) was introduced on every transfer of such assets.

“VDA exchanges in India have suffered significantly owing to the introduction of TDS at 1 percent, but Indians’ interest has remained largely unchanged,” said Sumit Gupta, cofounder of CoinDCX.

“Indian exchanges’ volumes have fallen by nearly 90 percent while Indian users’ adoption of foreign platforms has seen a massive rise.”

The high rate of TDS, which was introduced to track the movement of crypto assets, has only pushed transactions offshore.

“Not only have Indian consumers been left to rely on foreign exchanges, but their VDA activity is also not being tracked. I appreciate and support the objective of tracking VDA transactions, but this objective can be equally achieved with a lower rate of TDS at 0.01 percent,” said Gupta.

Ashish Singhal, cofounder of CoinSwitch, said a lower tax and TDS will be beneficial for the crypto sector.

“Suitable amendments of the policies will not only uplift the sentiment while keeping the required regulatory guardrails, but are likely to see long-term benefits that propel India’s digital economy narrative,” he said.

Parity with other assets
A key benefit of investing in traditional assets such as stocks, gold and bonds is the ability to set off losses in one asset against gains in another and to carry forward unadjusted losses to future years for adjustment. However, losses from crypto transactions can’t be adjusted against gains and neither can they be carried forward.

Rohinton Sidhwa, a partner at Deloitte India, said taxing crypto gains and not allowing losses to be carried forward or set off is economically unviable.
“Given the market losses that most VDAs have suffered in recent times, this is a key shortcoming,” Sidhwa said.

Shivam Thakral, CEO of BuyUcoin, said crypto investors should be allowed to offset and carry forward losses to provide a level playing field to these assets.

Crypto bill

While the government introduced crypto taxation in the last budget, it did not address the legality of such assets, a long-standing demand of the sector.

While attempts have been made in the past to introduce a bill to regulate crypto assets, the roadmap for such legislation is still not clear. Reports suggest the government is in the deliberation stage on a crypto bill.

“Although the tax part has been addressed, Web3, crypto assets, NFTs (non-fungible tokens) and the metaverse require a separate bill for other regulatory matters,” said Tarusha Mittal, cofounder of Dapps and UniFarm. “Further, the government should frame strong regulations for the sector in light of the FTX crisis, especially for centralised bodies dealing with crypto.”

FTX, the world’s third-largest crypto exchange, was forced to seek a bailout in November amid an unprecedented liquidity crisis following allegations of financial misappropriation.

Gaps in crypto laws

After the imposition of tax and TDS on crypto transactions, crypto trading volumes in the country declined. Experts said many investors are trying to bypass the tax regime by trading in grey markets, which is not great for consumer protection.

“High taxes and an unfavourable regime can lead to offshore regulatory risks and send consumer funds outside of India’s jurisdiction.

Consideration of cryptos as a virtual digital asset, but an imposition of a tax which is one of the highest amongst all asset classes, begs the question whether the policy framework is discriminatory,” said Singhal.

Gouri Puri, a partner at Shardul Amarchand Mangaldas & Co., said the crypto tax provisions introduced in the last budget were akin to the tax treatment of winnings from speculative income. Also, the current definition of virtual digital assets is very wide, Puri said.

“The Central Board of Direct Taxes has already issued clarification on the scope of virtual digital assets, by excluding gift cards, air miles and reward points, etc. Given the dynamic and ever-evolving nature of blockchain technology, the government may in future provide more clarity on the intended scope of virtual digital assets,” said Puri.

Experts said the introduction of the crypto tax was a positive step that showcased India’s willingness to adopt a progressive approach, but now it is time for the government to treat the crypto sector at par with other assets.