India’s crypto tax provides little legal clarity for traders and exchanges

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Earlier in February, Indian Finance Minister Nirmala Sitharaman announced a tax proposal that would bring the relatively unregulated digital asset space under the control of tax authorities.

The proposal includes a 30% income tax on crypto yield and a 1% tax deducted at source (TDS) on crypto exchange transactions over 10,000 Indian rupees ($ 133).

The announcement came during the parliamentary budget session for 2022, and the government has already set April 1 as the deadline for crypto exchanges to comply with the new tax regulations.

The introduction of the cryptocurrency has been widely misrepresented as a form of legal recognition of cryptocurrencies in India – a notion that has been denied by the head of the country’s Central Board of Direct Taxes.

Sitharaman reiterated a similar stance to Parliament a few days later, claiming that the government would only tax the profits from digital assets and in no way give them legal recognition. The legality of the crypto market will be decided later after appropriate legislation is introduced in Parliament.

A 30% crypto tax would do more harm than good

The 30% crypto tax is the highest in the country and almost doubles the corporate tax rate of 16%. The announcement saw mixed reaction from the crypto community in India, with exchanges calling it a welcome step to some level of recognition of the unregulated crypto market, while many crypto traders called it a setback.

Representatives of Indian crypto exchanges met with senior policy makers from the Ministry of Finance to appeal to the government, asking it to reconsider the proposed tax rules.

According to The Economic Times, industry leaders tried to explain that a 1% TDS could discourage small traders as well as lead to assets moving to foreign exchange. Representatives also outlined how difficult it would be to collect TDS on foreign exchange transactions without data to track. The discussions of the meeting presented various challenges in implementing the tax without clear regulations.

Despite the government insisting that taxation does not constitute the legal recognition of cryptocurrencies, Sumit Gupta, co-founder and CEO of Indian cryptocurrency exchange CoinDCX, told Cointelegraph that the proposal was a major move that brings greater legitimacy to digital assets. Regarding the high tax rate and its inherent complexities, Gupta said:

“There has been some discussion about the 30% tax figures, and some suggest it is a huge percentage bracket that may hinder greater innovation in the sector and serve as a barrier for investors and users of digital finance.”

He added, “Apart from the high rate, there are still gaps in clarity, especially when it comes to tax deductible at source. Specific sections on TDS remain ambiguous, preventing greater adoption of crypto. While progress in crypto has been encouraging, we must remember, that this is just the beginning of the crypto journey, and we look forward to greater developments on the regulatory front that will serve to grow and sustain the future of finance.

Some have claimed that the tax proposal was announced at random, and the government wants to tax the profits by leaving the losses for the trader to bear. The high tax could further discourage small traders and make it a market dominated by the rich.

Siddharth Sogani, founder and CEO of blockchain data analytics firm Crebaco, told Cointelegraph:

“Such a tax framework indirectly discourages anyone from entering crypto because a 30% tax, 1% TDS, and goods and services tax of 18% are charged on each transaction (on the brokerage / service fee). This becomes heavy on the pockets and also very difficult to fulfill because, in crypto, there are thousands of transactions per user per month.Previously, before this framework was announced, many paid taxes under the income of other sources under the tax rate slab.Losses, if any, were In a crypto, a bear market can last a few years, so losses (if any) should be allowed to go ahead. “

Several nations around the world have already received a strong reaction from retailers due to high taxation. South Korea had to postpone its 20% crypto tax proposal due to lack of clarity in regulations, while Thailand had to cancel its 15% tax proposal following a reaction from retailers. The Indian government would do well to note the evolving regulations around the world to introduce a balanced framework.

Nischal Shetty, CEO of WazirX – India’s leading crypto exchange – called the rates a positive approach. He told Cointelegraph:

“India is finally on the path to legitimizing the crypto sector in India. So, it is phenomenal news for everyone to learn about the GOIs [Government of India’s] a forward-looking approach to crypto as we discuss the best details as an industry. We believe that potential crypto investors sitting on the edge are now ready to access and participate in crypto. Therefore, pioneers in space want to build a favorable ecosystem for crypto and collectively discuss the implications of the current tax regime proposed at the grassroots level.

Cryptocurrencies could hinder foreign investment

The Indian crypto ecosystem has managed to thrive despite uncertainty about crypto regulations over the last three years. Despite the fact that the Indian government has not yet completed a project on a crypto bill, foreign venture capital firms and crypto exchanges have looked at the vast Indian market and its potential to become one of the goblins in the ecosystem.

Several Indian crypto exchanges have become unicorns (worth $ 1 billion or more) over the past two years, attracting investment from some of the biggest names on Wall Street. However, the recent complicated tax policies could prove to be disruptive on their plans. Sogani explained:

“I got a call from one of the top three crypto exchanges in the world considering entering India, but after yesterday’s announcement, they seem to hold back the idea. Only because of the complexity involved around crypto taxation. Clearly, a complicated tax framework discourage international companies from investing and starting operations in our country.India is a huge potential market for crypto due to the population strength we have.

TDS compliance and a high tax rate seem to be extremely difficult for multinational entities and exchanges to set up shop in the country. Crebaco estimated that about 10,000 young Indians are currently employed by Indian exchanges and crypto-focused businesses. Additionally, Indian coders are getting a lot of free employment opportunities from all over the world, and government policies like the new tax rules are starting to encourage “brain drain”.

India’s cryptocurrency rules have become a kind of paradox at this point. On the one hand, bringing a crypto under a tax regime gives it some level of recognition; but on the other hand, the government claims that the legal recognition of crypto can be determined only after the appropriate laws are introduced. This heavy tax on cryptocurrencies has only added more complexity for India’s crypto-entrepreneurs and traders.