March 27 2022: India, with an estimated 15 million active crypto users, and a population of close to 1.4 billion has the potential to become a crypto currency powerhouse-- but will goverenment let it happen?
In its hurried moves to tax at the highest level, emerging crypto currency transactions, even before it has fully understood or put a regulatory framework in place, the Indian government appears to be killing the golden goose even before it has laid a single egg. Experts fear this will only result in a 'brain drain' of crypto currency businesses and large investors to other financial centres like UAE and Singapore which are perceived to have a more encouraging regulatory environment for such emerging digital currencies
The Lok Sabha passed the Finance Bill 2022 two days ago, which introduced a new levy on virtual digital assets (cryptocurrencies) from April 1. Any income from the transfer of virtual assets will be taxed at 30 per cent.
The amended Finance Bill also proposed that any losses from the transfer of virtual assets will not be allowed to be set off against the income arising from the transfer of another virtual asset.
The Finance Minister said the government has proposed to tax virtual currencies because a lot of transactions are happening in that space. People are putting money, taking out, creating assets and money is being generated.
The Bill also proposed a 1 per cent TDS on payments towards virtual currencies over Rs 10,000 in a year and taxation of such gifts in the hands of the recipient… The provisions relating to 1 per cent TDS will be effective from July 1, 2022.
Experts, however, said the proposed 30 per cent tax, irrespective of whether crypto-assets are capital assets or not, will be detrimental to the investor growth that the industry has been seeing so far. This move will make day-traders incapable of saving on taxes even if they are not in the income tax brackets currently. Furthermore, not allowing investors to offset losses from one crypto trading pair by gains from another type will further deter crypto participation and throttle the industry growth.(Source: Deccan Herald).
Some earloy reactions:
Nischal Shetty, Founder and CEO of Indian cryptocurrency exchange, WazirX: We firmly believe that there is a need to regulate and tax crypto, but in its current form, it is poised to do more harm than good. It will also fail to provide desired results for the government. It can result in cascading participation on Indian exchanges that adhere to the KYC norms and lead to a rise in capital outflow to foreign exchanges or to the ones that aren't KYC compliant. This is not conducive for the government or the crypto ecosystem of India,”
He is also quoted in Yahoo Finance: "We have entered a period of pain…This is almost like not letting the industry function, and what will happen is what happened to the drone industry where eventually the largest drone industry is in China," ( quoted
Probir Roy Chowdhury, Partner, J Sagar Associates (JSA): While many in the cryptocurrency industry initially welcomed the inclusion of ‘virtual digital assets’ in the Finance Bill, 2022 (“Finance Bill”) – heralded as the government’s implicit acceptance of cryptocurrency, a deeper look at the Finance Bill demonstrates the government’s reluctance to encourage growth in this space. The Finance Bill seeks to impose a flat tax of 30% on cryptocurrency gains. While this would result in a 5% increase in tax payable by companies in trading in cryptocurrency, this would more significantly affect smaller ‘retail investors’ who may be in lower tax brackets or have been relying on lower capital gains tax rates. The Finance Bill also imposes a 1% TCS on payments to Indian residents for cryptocurrency transactions. This TCS will result in a drop in liquidity, as the TCS would be imposed regardless of profit or loss. The volatility of many cryptocurrencies has created a burgeoning community of high frequency traders, who will be significantly affected by the drop in liquidity on each trade. Finally, the biggest setback to the Indian cryptocurrency industry is the Finance Bill’s prohibition of setting off losses in one cryptocurrency against gains from another. Such a move could cripple the industry and severely affect traders who rely on hedging to ensure risk mitigation in their investments. Crypto players need to present a united front and challenge these overbearing provisions. Trading in crypto/virtual digital assets in not akin to gambling and this distinction needs to be made clear.
Even before Friday's passage of the Finance Bill, experts were voicing fears of a 'brain drain":
Sumit Gupta, the CEO and co-founder of cryptocurrency exchange, CoinDC: The various provisions under the new cryptocurrency tax law, which was introduced by the government during the Budget 2022, could lead to brain drain from the country and move the trading activity from the homegrown exchanges to global platforms...If you look at the countries like Dubai, Thailand, they are in the process of becoming the crypto hubs because of the positive regulations and attracting a lot of investments as well as talent from the world over. ( quoted in Business Today).
It was a perception that was shared by others: “The brain drain is absolutely crazy,” Sandeep Nailwal, whose Polygon operates the biggest so-called Layer 2 protocol for the Ethereum blockchain system, said in an interview from Dubai with Bloomberg. “I want to live in India and promote the Web3 ecosystem,” the 34-year-old said. “But overall, the way the regulatory uncertainty is there and how big Polygon has become it doesn’t make sense for us or for any team to expose their protocols to local risks."