Bittersweet Budget for cryptos, steep tax mars clarity cheer

The union government is finally on the path to legitimising the crypto sector in India. Finance minister Nirmala Sitharaman proposed to tax income from virtual digital assets at a high income tax rate of 30% in Union Budget 2022-23. While industry cheers for some clarity from the government on virtual digital currencies, including cryptocurrencies, some believe the high tax rate and no loss set off against other income are clearly bold steps that might discourage transactions in cryptocurrencies.

The FM in her Budget speech said, “There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. 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%.”

The FM also announced the introduction of the Digital Rupee by the Reserve Bank of India (RBI) next fiscal. “It is proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23," said Sitharaman in her Budget speech.

"It's interesting to note how our government is beginning to recognise crypto as an emerging asset class, given how our FM was referring to it as a virtual digital asset," says Nischal Shetty, founder and CEO, WazirX. He says that the biggest development was a clarity on crypto taxation. “We also hope this development removes any ambiguity for banks, and they can provide financial services to the crypto industry. Overall, it's good news for us.”

The announcement provides some relief to crypto investors as well. “After this concrete discussion around crypto in the Union Budget, investors can now execute crypto trading without any fear. The positive move by the regulators will legalise the billions of dollars invested by Indians in crypto assets and create a new tax revenue stream for the government,” says Shivam Thakral, CEO of BuyUcoin.

On the contrary, the high taxation rate, seems to be a deterrent to the interest of the investors and is similar to taxation of gambling, says L Badri Narayanan, executive partner, Lakshmikumaran & Sridharan Attorneys. Further, there is no allowable deduction apart from cost of acquisition. Losses cannot be carry forwarded as we currently have in security transactions. The entire scheme, as per Narayanan, appears to remove ambiguity and at the same time discourage people from investing in these assets.

FM further said in her Budget speech, “No deduction in respect of any expenditure or allowance shall be allowed while computing such income (on virtual digital currencies) except cost of acquisition. Further, loss from transfer of virtual digital assets cannot be set off against any other income. Further, in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1% of such consideration above a monetary threshold. Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.”

Ritesh Kumar, partner, IndusLaw, believes the taxation announcement on virtual digital currencies (cryptocurrencies) is not in line with what the industry was expecting. “The 30% rate of tax and restriction to set-off losses is a very bold move in discouraging transactions in crypto.”

There may be other technical issues in the taxation scheme of crytocurrencies as well. As per taxation experts, a nonchalant introduction of taxation on digital currency coupled with a withholding tax on every transaction could give rise to a lot of compliance issues for crypto businesses. “There will be practical issues in complying with tax provisions on transactions where the identity of the buyer is unknown,” says Harry Parikh, associate partner - M&A tax and regulatory services, BDO India.

While the debate on high taxation is on, digital assets and currency can now be viewed as an emergent asset class — thanks to clarity on how crypto will be taxed and creation of a digital currency by the central bank using blockchain. The time has come for sophisticated investors, says Arihant Bardia, CIO, Valtrust Capital, to better understand the risk and access investment opportunities, both in India and globally, in this emerging asset class.