Exorbitant crypto tax regime introduced by Modi govt will drive investors to grey market

After the brand new crypto taxes came into effect on April 1, the digital asset exchanges serving the Indian market have reported a massive drop in transaction volume and domain traffic.

As per a research and rating firm, the fall in transaction volume in the first two days of the trading since the new taxes kicked in has been in the range of 15 to 55 per cent. These exchanges have also seen a fall in traffic by 40 per cent.

Those who think that cryptocurrencies are detrimental to financial stability, can be used for illegal activities and terror funding, and are more like betting, gambling or casino games, would be pleased to hear that new crypto taxes have dissuaded people from investing and trading in digital assets.

The new crypto taxes include a 30 per cent capital gains tax on profits above Rs. 50,000 in a financial year and 1 per cent TDS at transactions above Rs. 10,000. The Rs 50,000 threshold for profits from crypto transactions to be taxed at 30 per cent is by any means a highly prohibitive measure.

Similarly, a transaction above Rs 10,000 attracting a 1% TDS will discourage investors from increasing the frequency of trades.

The trading on crypto exchanges on April 1 and April 2 is a clear indication that investors have stayed away from crypto markets in large numbers.

What makes these tax measures even more painful is the provision of losses on one digital coin not allowed to be offset on profits of another coin. So, it means profits on all individual trading are to be taxed while losses are entirely on the investors.

Industry experts believe that the exorbitant tax regime will drive investors from centralized exchanges to decentralized exchanges which ensure anonymity and privacy for the investors, and also dubbed as grey market.

As such, most crypto exchanges serving Indian markets are registered overseas. They maintain business offices in India.

Recently, 11 of these exchanges were identified for GST evasion to the tune of Rs. 80 crore and penalties over Rs. 90 crore was recovered from them.

According to crypto industry insiders, there is a big confusion among GST authorities over the classification of crypto exchanges. As GST is levied in four different slabs depending on the classification of a business, prolonged policy indecision led to confusion as to which slab digital assets belonged to.

Now, they are being considered financial services and attract the third-highest slab of 18 percent. However, GST authorities are reportedly planning to classify digital services in the same category as betting, gambling, casinos, and want to levy the highest 28 per cent GST.

While the Indian government is making an all-out effort to banish the crypto industry from India, the crypto industry ecosystem that has developed in the country so far is slowly moving away from India to more favourable jurisdictions such as Singapore and Dubai.

All the while, foreign companies are bullish on Indian talents in the IT and software industries. For example, the CEO of US-based crypto exchange Coinbase, Brian Armstrong, is in India scouting for fresh talent to power its growth. This remote-first company has already developed a technical hub in India where it employs over 300 people. The company plans to employ 1000 more staff here this year itself. Coinbase is hosting a two-day event in Bangalore to connect with the “students from top universities, crypto founders, Indian entrepreneurs, and crypto evangelists.”

“India has built a robust identity and digital payments infrastructure and implemented it at rapid scale and speed. Combined with India’s world-class software talent, we believe that crypto and web3 technology can help accelerate India’s economic and financial inclusion goals,” Brain Armstrong said in a blog on the Coinbase website.

What India lacks is a clear policy for the crypto sector. In absence of regulatory clarity, Indian talent is moving out of the country and there is a massive brain drain underway.

At the moment, the crypto sector remains unregulated and there is no law that protects the investors against frauds while the government has no qualm in collecting hefty taxes on profits.

The Advertising Standards Council of India (ASCI) has recently come out with a set of guidelines for the crypto industry ads, asking them to carry a disclaimer that investments in cryptocurrencies and NFTs and risky.

In the concluding days of the Budget session, the Indian Parliament saw a spirited debate on crypto taxes. Some lawmakers such as Shiv Sena’s Priyanka Chaudhary demanded that the government must ease the tax burden on the crypto industry while others, notably BJP’s Sushil Modi, argued that cryptocurrencies are dangerous and the government should rather increase the capital gains tax to 40 per cent.

The government is not ready to announce its position in the cryptocurrency sector just yet. It says it wants the process of broader consultations to be over and insights studied before taking a position. The government wants to align its position with the global consensus in this context. But India, being a natural leader in blockchain and cryptocurrency technologies because of its large talent pool and expertise in software development, should rather lead the industry than follow others in the global arena.

(IPA Service)

Views are personal