Analysis

Proposed Indian Crypto Tax Could Kill the Local Industry

The government is expecting to gain $1 billion in taxes from Bitcoin trades.

India is big, so is its cryptocurrency market. The country is one of the largest in the world in terms of crypto trading volumes, but the existing laws around digital assets are still muddy. While this puts the industry into uncertainty, the government is also missing out on taxes.

A local report recently revealed the Indian government’s intentions on taxing Bitcoin trades at 18 percent. Though there is no official confirmation or clarity on this move, the local industry is already alarmed by it.

“A regulatory framework needs to be in place for cryptocurrency before taxation is considered,” Ernst and Young partner, Abhishek Jain explained, and this is a good thing for the Indian crypto industry.

Currently, there is no proper regulatory framework specific to cryptocurrencies in India. And, when it comes to taxation, Indian crypto traders often rely on the rules meant for other assets.

“There are no formal rules or regulations issued by the tax department specifically for Bitcoin trades, as yet,” Varun Sethi, an Indian blockchain lawyer, told Finance Magnates. “So the current rules of Indian income tax and indirect tax, GST, are to be interpreted.”

“This action, or the lack of it, is indeed affecting local industry since there is no clarity in the law, thereby hindering foreign institutional entities to enter India with regulatory clarity and confidence.”

Additionally, Sethi sought clarity under the Indian Right to Information Act from the tax authorities but did not receive any answers even after many years.

18 Percent Tax Can Kill the Industry

However, the taxation proposal is more likely to be triggered by the government losing revenue from the crypto trades, not from its intentions to bring clarity to the industry. The Indian central government is already in a tussle with the states over declining GST revenue, and the booming Bitcoin trades can help fill the gap.

According to tax department estimations, the Indian crypto exchanges are handling around 40 billion rupees ($5.47 billion) in Bitcoin traders, and an 18 percent tax on them would generate a taxation revenue of approx $1 billion.

Indeed, after the apex court judgment lifting the 2-year long banking services ban to crypto companies, businesses of Indian exchanges are thriving. Major exchanges like CoinDCX have reported a threefold increase in overall trading volumes and four times quarterly increase in inactive users.

However, the local crypto exchanges are more concerned with the taxation percentage rather than the regulatory clarity associated with it.

“Taxing based in transaction value and that 18 percent will mean that if crypto doesn’t appreciate 18 percent, one will not make a profit,” B21 Founder and Director, Nitin Agarwal explained.

There is no clarity that the Indian tax department will see Bitcoin and other cryptocurrencies as a currency or any other asset. Currencies trades in the country are not subject to goods and services taxes, and only the currency exchange fee or brokerage can be taxed.

If the taxes are imposed as per currencies, it will only increase the legitimacy of Bitcoin, which is highly unlikely given the Indian government’s tough stance towards Bitcoin. The Former Indian Finance Minister even called digital currencies ‘illegal tender’.

Despite the confusion, the industry is speculating more on the worst-case scenarios.

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“Ideally, the tax on them should be less than 1 percent. Otherwise, trading will shift to international exchanges or peer-to-peer. India will lose out on revenues if a GST of 18 percent is levied,” Giottus crypto exchange Co-founder, Arjun Vijay, told a local publication.

Commodity or Currency? The Question of the Hour

Without the presence of any regulatory framework, it is more up to the traders how they want to declare the profits from the crypto income.

Sethi explained that all crypto gains or profits in India have always been taxable, the ambiguity is with their tax treatment.

“Whether the holding of crypto assets is a ‘capital asset’ resulting capital gains at 10 or 20 or 30 percent? Whether indexing option and set off of losses is possible? Or should the profits from trading in crypto be treated as business income and taxed at 30 percent rates, or as ‘other income’? Crypto traders are liable for their own compliance for the gains or profits made, thereby maintenance of track of trading history is a necessary action,” he said.

Moreover, many industry proponents are in favor of crypto taxation in line with other financial assets. Notably, the Indian government charges a 3 percent GST on the transaction value of gold, which is lower than the standard tax rates.

However, the proposed 18 percent GST on Bitcoin trades is very odd given the regulatory stance towards crypto, the existing tax laws, and the chances of the crypto industry survival. Nothing is falling in line.

“There are many open debatable questions, where India can draw reference from the countries or states like Wyoming or UK, who have brought in clarificatory regulations, though they are also evolving,” Sethi said. “For instance, Wyoming (US) treats crypto assets as ‘property’ and applies property laws to it. The UK calls them ‘capital assets’ and treats them as per the ‘nature of trade’.”

A Vigilant System Already in Place

No matter how the Indian government wants to tax crypto, it already has the infrastructure and data on crypto traders. 

The local exchanges collect mandatary KYCs and tax information from every client, and the government has easy access to these databases under existing laws. So, while countries like the United States are struggling with collecting crypto data, India has a clear advantage.

“Collection of KYC is a necessary act by crypto exchanges since it is needed as part of ‘know your customer’ guidelines and also as part of anti-money laundering policy,” Sethi detailed. “However, the government is also eligible to obtain these databases from these exchanges about traders and their trades as part of government compliance under the prevention of money laundering act.”

Possibility of Another Ban?

Many local media reported that after the central bank lost its case against crypto exchanges, the Indian government is planning to ban Bitcoin and other cryptocurrencies with a new law.

However, plans to tax Bitcoin trades would force the government to shelve such immediate plans as it would need to define the status of Bitcoin.

Sethi said that the Indian crypto community is eagerly awaiting regulatory clarity on crypto from the central bank. Furthermore, it is seeking clarity on the applicability or non-applicability of FEMA laws.

“This area is a contemporary law and was earlier lawless. However, global developments in the crypto legal space surely make this space interesting from a legal perspective,” he added.

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