The Government of India's concerns over cryptocurrencies have been on the rise, which they mainly attribute to terrorist financing and money laundering. This has been a consistent position on the government and the view of the Reserve Bank of India.
However, despite the continued 'Ban Cryptocurrency' Narrative Set by the runs batted in, the government has decided to impose taxes on virtual digital assets (VDAs), including non-fungible cryptocurrencies and tokens. Under the 2022 Budget, capital gains derived from crypto assets will be taxed at 30 percent, regardless of the tax bracket the taxpayer falls under.
Furthermore, losses incurred by one digital currency cannot be offset by gains from another, and carryover of losses to future years is not accepted. However, the final step to this tax surcharge was a 1 percent deducted-at-source (TDS) tax applied to every transaction/trade made on a VDA. This caused a big drop in volumes in VDA trade in the Indian cryptocurrency industry, with trading volumes on national exchanges decreasing by almost 97 percent.
The ongoing TDS fee implementation has forced crypto asset traders to transfer activity abroad, which invariably leads talent in the field to migrate abroad. We can still stem the flow and even attract talent to India if there is any semblance of reprieve in the next Budget 2023.
Web 3 Diaspora
Despite the drop in trading volumes on Indian cryptocurrency exchanges, interest among young investors in the Web 3.0 space has only increased in the past year. At a recent event geared towards Web 3.0 developers in Bangalore, Karnataka, we saw more than 400 new project submissions with the participation of more than 20,000 people from all over the world. This just shows that the government has misunderstood the zeal and commitment of the Indian Web 3.0 startup ecosystem.
The government must engage those who work in the Web3/crypto/VDA industry and work together with them to create a beneficial atmosphere for growth. India has the Second largest blockchain developer in the world and we have the potential to create world class products from India. We are not just a service provider. The government must consult the industry and facilitate the construction of a self-sufficient industry with relevant and forward-looking laws.
New laws
The current regulatory system is insufficient for the Web 3.0 industry. We need a Web 3.0 focused regulatory body that is responsible for the necessary oversight in the VDA markets. Current financial supervision laws may not serve the purpose of VDAs, but best practices from other bodies can be translated into this space.
A new Web3/VDA regulation must be created in a sandboxed mode that enables rules that allow an enterprise to operate in a controlled environment. In a controlled environment we can build important practical applications, usage rules, encourage experiments, bypass external influences, and build scalable and rapidly executable business models. This is the best way to enable rapid innovation.
Build an Industry-Government Combo
India has a host of up-and-coming talent making their mark in the world of VDAs, the metaverse, blockchain, decentralized finance, and more. In the next budget, Finance Minister Nirmala Sitharaman could propose regulating the industry by forming a committee of professionals well-versed in the field, along with progressive bureaucrats and government officials. This committee could be instructed to draft laws, develop new policies, and engage with industry to fuel the emergence of these innovative technologies in India.
reduce taxes
It's been about a year since the VDA taxes were implemented and while it was a step in the right direction, you can be more inclusive in your approach. It is time to reduce the tax burden and implement regulations for more clarity and oversight. The sandbox approach mentioned above can be useful here.
A tax cut with more oversight will improve tax collection, as merchants who were left out of the bargain last year will return and increase treasury coffers. Last year, according to reports, around Rs 60 crore was collected as TDS from crypto trading transactions. With over 5 million merchants, this number could have been much higher.
the right momentum
India has immense potential to be a leader in the field of digital asset management. In order to give this sector the necessary impetus, the next Budgets must give the appropriate impetus to this space. We urge the establishment of a governing organization to help promote the development of this sector and make regulations to ensure optimal, equitable and responsible use of technology. It is imperative that the government recognize and support this technology and pave the way for further innovation and development, which will ultimately boost India's economic growth.
(Lokesh Rao, Co-Founder and CEO, Trace Network Labs)
(Opinions expressed are those of the author. They do not necessarily reflect the views of DH.)
