In late November 2021, the government’s legislative agenda for the Winter session of the Parliament spooked cryptocurrency investors and led to panic selling. The agenda showed that the government was planning to introduce a cryptocurrency bill that would create a framework for creation of official digital currency, while prohibiting all private cryptocurrencies in the country. Later it was clarified that such a bill would only be introduced post cabinet approval.
In the Budget on Tuesday, Finance Minister Nirmala Sitharaman announced that the RBI will issue digital Rupee in 2022-23. Sitharaman also announced that income from transfer of virtual digital assets will be taxed at 30 per cent.
A tax on virtual digital assets is perhaps a clear indication that the government will legitimise transactions in areas like cryptocurrencies and NFTs (non-fungible tokens). At the same time, the high tax may perhaps become a disincentive for small investors.
Apart from a 30 per cent tax on transfer of virtual digital assets, Sitharaman has announced no deduction will be allowed in respect of any expenditure or allowance while computing such income except cost of acquisition. Additionally, loss from transfer of virtual digital asset cannot be set off against any other income. Also, there will be 1 per cent tax deducted at source and gifting virtual digital assets is also proposed to be taxed at the hands of the receiver.
“Tax has always been applicable to gains on virtual digital currencies, but the ecosystem did not have clarity on it. The move to tax virtual digital assets gives the entire ecosystem including investors and exchanges transparency on the road ahead,” said Avinash Shekhar, CEO of ZebPay.
While he feels the 30 per cent tax is high, its still a positive step as it “legitimises crypto and hints at an optimistic sentiment towards further acceptance of crypto and NFTs across stakeholders in the country.”
Nischal Shetty, founder and CEO of crypto trading platform WazirX also welcomed the move on tax clarity on virtual digital assets.
“By bringing in taxation the government legitimises the industry to a large extent. The majority of people, especially, corporates who have been sitting on the sidelines because of uncertainties will now be able to participate in crypto,” said Shetty.
He is also hopeful that that this will also now remove any ambiguity for banks and they will now be able to provide financial services to the crypto industry.
However, a tax on digital currency could also give rise to lot of compliance issues, feels Harry Parikh, associate partner– M&A tax and regulatory services at BDO India.
“There will be practical issues in complying with tax provisions on transactions where the identity of the buyer is unknown,” said Parikh.
Sundara Rajan TK, partner at DVS Advisors LLP, also feels that the high tax on virtual digital assets is an indication that the government intends to discourage the same and that the government shall not permit cryptos as a currency.
That could well be the case given the government plans to launch its own blockchain-powered digital rupee starting 2022-23.
“Introduction of Central Bank Digital Currency (CBDC) will give a big boost to digital economy. Digital currency will also lead to a more efficient and cheaper currency management system,” said Sitharaman.
A digital rupee will lead to stable, efficient, regulated payments and settlements and lowered transaction cost, feels Rajosik Banerjee, partner and head of financial risk management at KPMG in India.
“Rupee in CBDC form, if not constrained by only existing banks being allowed to participate, can be a game changer for payments, credit and capital markets. It can significantly improve financial inclusion in India by enabling faster innovation not constrained by legacy systems,” said Swapnil Pawar, founder of blockchain startup ASQI.
India will join a select few countries like China that have an official digital currency and could have a lot of implications on the payments ecosystem and the wider financial sector.
“This will usher in innovation around securities settlement for capital markets, atomic transactions, programmable payments around DBT (direct benefit transfer) and eventual cross boarder payments as well,” said Monish Shah, partner, Deloitte India.
The time line for the launch and actual guidelines for the digital rupee by the RBI will now have to be watched out for.
