India’s Crypto Tax

02 March 13:10

TL;DR

There are daily happenings in the cryptocurrency ecosystem, and one of the more recent happenings is about India's crypto tax. To regulate cryptocurrency in India, the government recently announced a 30% tax on cryptocurrency transactions as part of the Finance Bill for 2022.

This post gives information about the government’s stance on cryptocurrencies in India. Last year, there was a discussion in India about outlawing private cryptocurrencies and introducing a digital currency (Digital Rupee) by the Central Bank of India. Around March 2021, Narendra Modi's administration proposed a blanket ban on cryptocurrency activities in India. However, a major part of the population was against the cryptocurrency ban. Less than a year down the line, the government has towed a different path in regulating cryptocurrency rather than a blanket ban.

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If you are a regular observer in the cryptocurrency space, this article provides you with insight into the happenings in the local crypto ecosystem in India. India is the world's second-largest population with crypto investments of over $10 billion and over 100 million cryptocurrency owners; the country is a relevant player in the global crypto space. We will talk about the impact of this tax on crypto trading in India and the framework to be adopted for the taxation.

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With over 100 million users of cryptocurrency, approximately 7.3% of the population owning cryptocurrency, it is an important aspect of the financial system. Data shows that cryptocurrencies have been widely adopted in India; figures show that between March 2020 and February 2021, the volume of trade increased by 500%. As of 2020, data shows that the volume of daily Iran, one of the countries to test a National Cryptocurrency5 trade in India was about $60 million.

Top 10 Countries With Most Cryptocurrency Holders

Source: C# Corner

Since 2018, there has been a legal tussle about the use of cryptocurrency in India with the RBI banning banks from providing services relating to cryptocurrency. However, in March 2020, the Supreme Court of India set aside the ban in a ruling of Internet and Mobile Association of India v. Reserve Bank of India. In 2021, the Cryptocurrency and Regulation of Official Digital Currency Bill were proposed to create a digital currency and outrightly ban other cryptocurrencies. However, in 2022, Finance Minister Nirmala Sitharaman is singing a new song with the announcement of a cryptocurrency tax rate which will kick in starting from April 1, 2022.

In a quote, the Finance Minister said "Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 percent,”. This statement was made on February 1 and has drawn reactions from many cryptocurrency experts in India. While some have welcomed the tax viewing as the government's openness to cryptocurrency, some have expressed concerns about the tax being a discouragement for new investors from India. Another aspect of the new tax regime is the 1% tax deduction at the source when trades and transfers are made.

With this new tax regime, certain ambiguities exist like what is the scope of "virtual digital assets", how the crypto gains will be calculated, etc. Considering that the high tax rate is similar for the betting industry, there is a perceived effort from the government to discourage investors from cryptocurrency. However, experts hope that as years go by, the tax rate will be reduced to encourage more investors.

What are Virtual Digital Assets

A statement explaining the cryptocurrency tax in the new Finance Bill is quoted as follows, "Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially. Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly, a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill."

Now the question remains; what are virtual digital assets?

Considering that blockchain technology is dynamic, it is expected that the law has to cover for any new changes to the cryptocurrency ecosystem to avoid future legal troubles. As expected, the term "virtual digital assets" has been given a broad definition to meet up with any future changes. According to the proposed legislation, a virtual digital asset includes any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise. The spectrum of this definition covers NFTs.

How Are Cryptocurrency Gains Taxed in India

Based on Section 55 of the Income Tax Act of 1961, cryptocurrencies and NFTs are non-taxable because they do not fall under the jurisdiction of that law. However, starting from the 1st of April 2022, any income from digital assets will be taxed at 30%. This provision is from the Finance Bill of 2022.

What is the framework behind taxing the gains made from cryptocurrency assets?
There are different scenarios in which cryptocurrencies can produce gain. Also, there are arguments along the lines of cryptocurrencies being an asset or being a currency. The provisions of the Finance Bill show that cryptocurrency is regarded as an asset hence when a person receives payment with it, it will be taxed as an asset.

In addition to the 30% tax on cryptocurrency income, there is also a 1% tax on deduction from the source. This tax will be deducted from the receiver and paid as taxes. 1% TDS is reportedly the government's way of keeping track of cryptocurrency transactions in the country.

In whatever capacity the cryptocurrency is used, the individual is expected to report the income from the transaction, this income will be taxed just like the capital gains tax. If bitcoins or any other cryptocurrencies are used as payment for goods and services, the receiver will pay the tax incurred where the amount received is perceived as an income.
Another scenario is if cryptocurrencies are used as an investment vehicle, the tax will be paid on the resulting profit made from the investment. If you are a cryptocurrency trader, the tax will be paid on every profit made from the buying and selling of the cryptocurrency. NFTs are also not left out, as every profit made from the sale of NFTs will attract tax.

One fundamental question is whether individuals and corporate entities are expected to pay these taxes with help from taxation experts. Alternatively, the government may work with cryptocurrency exchange platforms in India to automate tax returns.

Author: Gate.io Observer: Olatunji. M
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