The Union Budget’s triple whammy of 30 per cent capital gains tax, 1 per cent tax deductible at source (TDS) and inability to offset losses or even carry it forward, casts a dark shadow over the sunrise crypto sector.
The heavy taxation on cryptocurrencies could hurt the prospects of the industry in India, especially in talent and investments
The Union Budget’s triple whammy of 30 per cent capital gains tax, 1 per cent tax deductible at source (TDS) and inability to offset losses or even carry it forward, casts a dark shadow over the sunrise crypto sector.
Of course, it is quite a relief that we have moved from a 10-year jail and Rs 25 crore-fine in the 2018 Bill to a common tax framework. So, while this recognition is overall a good thing, the way the taxes have been proposed, it seems that the government has taken this decision too hurriedly. This could lead to the loss of new opportunities for industry participants to expand in this space that global leaders like Jack Dorsey and Elon Musk are aggressively targeting.
More importantly, any tax strategy needs to be fair to the country's citizens and encourage them to declare their holdings honestly. Given the small number of taxpayers, a flat rate of 30 per cent may encourage people to find ways to get around the stringent tax laws. Ideally, a tax rate of 10-15 per cent would have made more sense because most investors in the market have holdings of between Rs 5,000 and Rs 1 lakh, and very few invest more than that. A simple way would have been to use the existing slabs for taxation according to income levels.
Not all of the Union Budget’s proposals will be implemented from April 1, 2022; some will kick in from July 1, 2022; and yet others, from April 2023.
Another essential point is the cost of acquisition. For existing and future crypto miners, opportunities such as ‘nodes as a service’ holds huge potential. ‘Nodes as a service’ typically provide an Application Programming Interface (API) key that can be used to write to and read from the blockchain. This is a significant omission because India is seen as a tech factory to the world because of its immense talent and infrastructure. If appropriately regulated, it has the potential to become a multi-billion-dollar market. Currently, we are at the crossroads of a potentially massive opportunity loss that could change the fortunes of its people and the country. Such strict guidelines and inconsistencies are a clear red flag for global companies and exchanges.
Another disturbing fact is the taxation on any income received by a trust will be taxed at 30 per cent. We must not forget that one of India's biggest crypto-led charity initiatives, focused on Covid, raised hundreds of millions of dollars in a matter of weeks, according to a statement by cryptorelief.in. A tax of 30 per cent will discourage philanthropy as well.
What is discouraging is that start-ups get a tax rebate, but cryptocurrencies that will be at the forefront of the Web 3.0 ecosystem, get heavily taxed. And to be truthful, discouraging new entrants will not take India to new highs; instead, it will encourage them to move out to benefit other nations.
There is a reason behind Facebook renaming itself Meta (Metaverse-Web 3.0), and Jack Dorsey building a new decentralised social media platform called Blue Sky. Dorsey also left Twitter to focus on a crypto-focused company (Square). These visionary entrepreneurs have recognised the potential of this ecosystem and have taken the first step towards it.
The Indian exchanges and crypto-focused companies employ around 10,000 young Indians. In addition, Indian developers are getting enormous freelance opportunities from across the globe, which will encourage another round of brain drain from our country.
Just before the Union Budget, we were getting enquiries from one of the leading crypto exchanges interested in India. Their plans seem to be gone into cold storage now.
What seems to have happened is that the government has taken the easy route because of the complexity of cryptocurrencies
However, India is a huge potential market for crypto due to its population strength. But Goods and Services Tax (GST) compliances, TDS compliances, and a heavy tax rate make it very difficult for international entities and exchanges to start operations in India, which, in turn, means loss of employment opportunities and direct investments in our country.
I hope the new regulations will consider all these aspects and provide the industry with enough encouragement so that the international community looks at the Indian market more favourably. This is the moment, and we should not lose it.
The author is the CEO of CREBACO Global