Evaluating The Current Taxation Policy On Crypto Assets
By D. Rajasekhar
Director, Institute for Social and Economic Change
The impact of the pandemic left no sector untouched. It fundamentally altered the world’s perception on everything from holistic wellness to financial planning. As the ripple effects of COVID-19 were felt by economies across the world, in India, all financial products including commodities and the stock market witnessed dynamic changes day in and out. The cryptomarket was no exception. The uncertainties that came along with consecutive lockdowns resulted in economic extremities and meltdowns. While most other assets and financial instruments locked eyes with turbulence, there was a shocking resilience in crypto assets. This, along with the rapid increase in digitalization and access to the internet has resulted in increased adoption of crypto assets among Indians.
How Crypto Assets became an Investment Staple
The currently unregulated digital assets, particularly Bitcoins, witnessed a spectacular rise in investments. As more and more young investors join the markets, they are looking towards diversifying their portfolios.
Though cryptocurrency like all other assets is bound to see price corrections, it is the stable rise in its pricing has driven momentum to its adoption as a viable asset. Further, it isn’t just crypto enthusiasts that find crypto to be a solid asset to invest in. Today, everyone who is looking to diversify their portfolio to limit risk finds themselves dabbling with these.
What increased Startups’ inclination towards Blockchain Tech
This rise in adoption and demand for trade has not subsided even post the pandemic. According to Blockchain analysis platform Chainalysis, India ranks fourth in the global crypto adoption index for 2022.
The startup ecosystem in India has revelled in this acceptance. More and more startups based on blockchain technology are sprouting up. The technology is known to be transformational, not only in the sector of finance but also in other sectors including health, aviation, and media.
There are a number of homegrown crypto exchanges that have seen this demand coming. These include well-known players such as CoinDCX, Bitbns, CoinSwitch Kuber, two of which have already been listed as Unicorns while the other is a bootstrapped success.
The Government’s criticism of Crypto
Owing to concerns about users’ security and reportage of fraudulent activity, the Indian government has been a vocal critic of crypto.
In 2018, the RBI issued a blanket ban on crypto by stopping banks and payment system providers from dealing in virtual currencies, which was quashed by the Supreme Court in 2020. There was an unsaid consensus in identifying crypto an asset class – indicating that there could be headway in its legitimization.
Why better Taxation is needed to do Indian traders and exchanges justice
When the conversation on tax regulations around crypto assets picked up steam, it was welcomed by industry experts in the hopes that this would further pave the way for the regulation and legitimization of digital assets.
However, what happened next was unprecedented. Despite the industry’s heavy uproar, the Lok Sabha passed strict taxation laws in February 2022, levying a 30% capital gains tax on crypto transactions. During the announcement, India’s Finance Minister also said that losses incurred from their sale could not be offset against other income. Offering no exceptions, these stringent laws for domestic exchanges in India’s nascent but strong crypto market were touted to be conducive for not just the ecosystem but also the government.
Indian crypto exchanges have no choice but to comply with these disincentivizing laws, making trading on them difficult as opposed to foreign exchanges. As expected, crypto trading hasn’t gone down. Rather, it is domestic crypto exchanges that have seen cascading participation. Trading volumes have changed remarkably on these platforms, with these plunges have eaten into their revenues.
With more and more people choosing to trade with offshore companies operating in India, there is a rise in capital outflow to foreign exchanges, particularly those of Chinese origin. The irony is that companies of China-origin and Chinese-origin founders are running crypto exchanges in India while China itself has banned cryptocurrency and allied crypto businesses.
Further, once this money travels to Chinese exchanges, it leaves the ambit of the jurisdiction of India. In addition to losing out on tax revenue, there is also no traceability of this trade, which is counterproductive to the government’s endeavours.
The Need of the hour
There is an increased acceptance of crypto assets at large in the country. Indian users are widely choosing crypto assets as an investment choice. This makes well-thought-out regulation of the ecosystem the need of the hour.
As the world moves towards drawing up a crypto framework, India needs to revisit its taxation policy to the benefit of not only the consumers but also the economy at large.
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