Budget 2022 slapping a 30% tax on crypto income will hurt new investors: Experts

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The crypto industry is having mixed sentiments after the finance minister announced a 30 percent tax on income from cryptos and other virtual assets. In a panel discussion held by Moneycontrol, the experts welcomed the move but raised a number of concerns on its impact on the industry.

Many argue that after years of speculation and discussions of a ban on cryptocurrencies, a clear tax regime is a step towards a more structured recognition for cryptos by the government. But, a 30 percent tax rate could discourage investors especially new ones from dabbling in an asset class that is still struggling for wider acceptance among governments globally.

Moreover, cryptos are now taxed on par with gains from speculative activities such as gambling, and lotteries, etc., putting the digital assets in the highest tax band.

Ashish Singhal, founder and CEO of one of the most valued crypto exchanges in India, CoinSwitch, sees this as a start but is hoping that the government may relook at the tax rate. “Definitely there is a sign that they want to deter people from trading but still want to see how this industry progresses. Overtime hopefully there could be amendments once the government sees how reducing the tax bracket could actually increase revenues by encouraging more investors to come in,” Singhal said.

Anoush Bhasin, founder of tax advisory firm Quagmire Consulting, echoed a similar view. “Usually it (high tax rate) is done for industries like betting, the Government wants to deter people from entering the space. Also, incidental deductions are not going to be allowed which is unfair. But, surely through recommendations and amendments, we will see a better tax bill going forward,” he said.

However, what is being seen as an important move is the definition of a new asset class. According to Rameesh Kailasam, CEO of IndiaTech.org which represents startups and investors, the tax gives partial recognition to the crypto industry and signals to other stakeholders including the RBI, GST department to tweak their regulations so as to include this newly recognised asset class.

Kailasam added, “But, we still need to look for more clarity on the cost of acquisition because what the memorandum tells us is that the amount you spent on buying the asset, tax is charged on that. However, the buyer has other expenses like gas fees, translation fee on the platform, these are the further clarifications that the industry stakeholders should ask.”

Ambiguity still remains on what the impending bill on cryptocurrencies will hold. In an interview with Network18 post the budget, Finance Minister Nirmala Sitharaman said that consultations are still on with various stakeholders and clarity is awaited on what the bill will do.

According to Sathvik Vishwanathan, CEO and founder of crypto exchange Unocoin, the government has found a middle path for now.

“They don’t want to encourage this, but also want to look at it as an asset-based activity where people invest with an expectation of appreciation in value. So this is a very creative solution in my opinion,” Vishwanathan said.

Over the past year, the number of crypto investors in India has increased to over 15 milllion. Startups in this ecosystem have also attracted huge investments and two unicorns, or startups with a valuation of at least $1 billion, have emerged – CoinDCX and CoinSwitch.

With a high tax structure likely to discourage new investors from entering the space, is the funding boom likely to pause? Nitin Sharma, partner at venture capital firm Antler India sees a short-term impact.

“In the short term, the asset side (crypto trading) could see a negative impact from the funding perspective. But, overall the regulatory risk is significantly lower and the foreign capital flow will continue,” Sharma said.

Further, Sharma expects more startups to come up in Web3 in India only if more regulatory and legal clarity emerges in the space.

Besides the 30 percent tax, the budget also said that a 1 percent tax deduction at source (TDS) will be applicable when trades and transfers are executed. Experts see the minimal TDS as a reason to ensure that all transactions can be tracked. This signals the need for increased compliance and a requirement of KYC for all investors.

“I don’t see a major change from a compliance standpoint,” said CoinSwitch’s Singhal. “What will happen is that now people will not be able to trade if they do not have a PAN Card. So the KYC aspect has now become mandatory with TDS being applied,” he added.

However, Darshan Bathija, co-founder and CEO of crypto platform Vauld, holds a different view. “The TDS charge will increase volatility and remove liquidity from the market. It will kill the market makers from ever making markets in India which would mean liquidity on the exchanges and ease of executing block trades would effectively become much much harder,” he said.

Sriram Mani contributed to the story.