The budget for the 2022-2023 financial year was presented by the Minister of Finance on 1st February 2022. The government has put cryptocurrency in a new light with the advent of a new tax regime for virtual digital assets. The central government has proposed to levy a 30% tax on income from the transfer of any virtual digital asset such as cryptocurrencies and non-fungible tokens (NFTs).
Such a move was inevitable given the increased use and proliferation of cryptocurrency and digital assets in India. Considering the ease of access to highly valuable assets like cryptocurrency, for example through apps like CoinDCX, CoinSwitch Kuber, etc., this is a decision that was long overdue.
Reason for such taxation
The central government has spoken out on the use of cryptocurrencies as a medium of monetary exchange. The Indian government even introduced a bill in 2019 known as the “Cryptocurrency Prohibition and Official Digital Currency Regulation Bill”. But the bill has not yet been adopted. India’s central bank, the Reserve Bank of India (RBI), imposed a ban on banks trading cryptocurrencies in 2018, but that ban was lifted by the Supreme Court in 2020 in the Internet and Mobile Association case. of India vs. RBI”. Since then, there has been a phenomenal increase in transactions related to virtual digital assets as well as the prices of these assets, as well as the recent rise in popularity of non-fungible tokens. According to an analysis done in the crypto finder report around 30% of the adult population in India owns cryptocurrencies. As cryptocurrencies have established a substantial market in India, it was imperative for the central government to come up with a tax regime for people who trade in virtual digital assets.
The government has provided that in order to allow authorities to capture transaction details TDS at the rate of 1% on the transfer of virtual digital assets above a monetary threshold. The Minister of Finance has also provided that a tax will be levied on the recipient even if the virtual digital assets are transferred as a gift.
Cryptocurrencies as an asset and not as a currency
The finance minister in a press conference after the parliamentary proceedings had planned that “all but the currency that RBI will issue (the digital rupee) are considered assets”.
A currency is only considered legal tender if it is issued by a central authority (or central bank) and is backed by a sovereign guarantee. This currency is destined to be accepted by the parties as a mode of payment and opens the way to a centralized monetary system.
Cryptocurrencies, on the other hand, are not yet issued by a central authority and the data of each transaction is available online in the public domain. Therefore, they pave the way for a more decentralized system where cryptocurrencies are only used for payment if the recipient is willing to accept it. The transaction in the crypto market or world is about digital assets. Assets are created by individuals and therefore income from virtual digital assets such as cryptocurrency would be termed as assets and taxed accordingly because due to the rise of digital assets such as cryptocurrencies and NFTs, a significant number of people are making profits and there are even people who solely depend on these assets for their income. It would be unfair not to tax people who make profits on such transactions.
That said, a decentralized approach to currency is highly questionable, and governments around the world remain varied when it comes to decentralized digital assets and currency.
Implications of such a tax regime on virtual digital assets
The tax imposed on digital assets such as crypto gives this industry a sense of legitimacy. The government had insisted on imposing a ban and various other restrictions on these assets, but this taxation scheme could be a step in the right step to give confidence to people who are engaged in such transactions with the fact that the Reserve Bank of India will issue its own digital currency in India this year, thus clarifying the future of currencies and digital assets in India.
This will ultimately pave the way for the mass adoption of such assets in India. The tax levied on virtual digital assets is 30%, which is within the tax bracket of gains from speculative activities such as lotteries, gambling and other gambling activities..
Not only is the tax rate quite high, but pairing or even comparing cryptocurrencies or NFTs or any virtual digital asset with speculative assets may not be fair. Cryptography is an asset class and trading or creating such assets requires certain skills or specific skills that may not be comparable to activities such as lotteries, gambling, etc.
The proposed guideline for taxing the donation of virtual digital assets would have an impact» assets that refer to cryptocurrencies that are provided free of charge to investors at the time of their launch. These cryptocurrencies will also be taxed at 30%.
Investors will also not be allowed to offset their losses with any other income and no deduction is allowed in respect of any expense or allowance when trading these currencies other than the cost of acquisition..
Although the tax imposed on virtual digital assets is much needed, the tax regime introduced may impose an unnecessary burden on investors, due to the high tax rate. Regarding the tax return, it has been made mandatory to file a tax return even if the person has tax liability from the crypto income, even if his income is less than 5 lakhs. These types of can place an unnecessary burden on the assessments as well as the income tax department as according to the report published by finder the major demographic of the Indian population dealing with crypto transactions is between 18 and 24 years old.
The practical implications remain to be seen, for example, the crypto market could be heading for a sell-off before the end of this fiscal year (31st March) since the proposed tax regimes will be levied from the following fiscal year. The future of virtual digital assets looks positive and hopeful, especially when it comes to India and some regulations, when properly drafted by legislation, might even provide tax breaks and various promotion schemes if , in the near future, the government also seems optimistic for growth and mass adoption. of digital assets such as people. This would require the business to keep in mind the security aspect of creating a safe and seamless channel for people to engage and own assets in a digital and virtual environment.