India needs to make up its mind on crypto
India’s new crypto tax proposals have caused more confusion than clarity. Under new rules due to come into effect on April 1, income from cryptocurrencies will be taxed at 30% – the highest tax bracket in India for assets.
The legislation also adds smaller additional taxes, including a 1% withholding tax for all transactions over approximately $134. This double taxation would mean traders and investors would pay up to 34% on their trades, says Rahul Garg, managing partner at tax consultancy Asire. “Not enough consultation was done with the industry” before announcing these rules, which is why there are “multiple gray areas that lack clarity”, he added.
More than 80,000 people have signed a petition urging the government to reconsider the new rules, but according to recent rhetoric from Delhi, few in power have much ambition to embrace cryptocurrency, with some continuing to demand a outright ban.
Some say the confusing messaging will lead to a fledgling industry scam and force others to move to more open hubs like Singapore and South Korea. Crypto exchange Zebpay left India for Singapore and Malta amid regulatory tensions in 2018, while some investors recently said Forkast they plan to move after the tax announcement.
To ban or not to ban
The Indian government has not been shy about sharing its views on the dangers posed by crypto speculation. The Reserve Bank of India, the country’s central bank, has repeatedly warned against investing in crypto and even Finance Minister Nirmala Sitharaman called it a “risk zone” last year.
But when the government unveiled its plans to regulate the industry, it was seen as a green light by the crypto community.
However, the tax is increasingly seen as a way to curb, not encourage, infant industry. In parliament last week, Sushil Modi told ministers the tax was put in place “to deter people from investing in crypto, as it is highly speculative and volatile.”
The high tax rate itself is evidence of the government’s mindset, which is to discourage crypto trading, Garg says. “This base rate of 30% that we have for income that people generate from activities like horse racing, gambling. So somewhere, the mindset of the government is to discourage this [crypto trading],” he added.
The government confirms Garg’s assertion. Finance Secretary TV Somanathan said a day after the tax was announced that the tax framework “treats crypto assets the same way we treat winnings from horse racing, or betting and other speculative transactions.” .
As ministers try to appease angry investors and traders, the RBI continues to call for an outright crypto ban, calling them worse than Ponzi schemes and not even a ‘tulip’ – making reference to the speculation surrounding the prices of flower bulbs in the 17th century.
Finance Minister Nirmala Sitharaman said earlier that taxation does not equate to the legitimacy of the crypto industry and that the government has the sovereign right to tax income, whether it comes from legal means or illegal. She also said that no decision has yet been made on whether crypto should be banned or regulated, meaning a ban is still on the table.
Garg says the tax rate is not only a problem for individual traders with low investments, but could also prevent institutional investors from entering the sector in the future. Companies in India are subject to a 25% tax, which is significantly lower than the 30% tax prescribed for crypto income. Therefore, institutional investors will have to pay a higher tax on their crypto income.
Even the 1% tax to be levied on all transactions at or above the very low threshold – INR 10,000 or USD 132 and INR 50,000 or USD 662 for specified persons – is aimed at curbing active market transactions, Rahul Gaitonde , a crypto investor and advisor to blockchain companies, said Forkast. “The intent appears to be quite simple. It is intended to curb the type of active trading that appears to be continuing… [but] speculation is an important part of any financial market, and so, therefore, limiting trading volumes using a 1% tax is probably not good,” he said.
The 1% tax for crypto transactions can be compared to the Securities Transaction Tax (STT) which is levied by exchanges. The rate of STT ranges from 0.001% to 0.2%.
But for crypto, the combination of the much higher rate and the low threshold makes speculative or active trading in the market potentially less profitable, if not entirely unprofitable.
Exchanges have previously expressed concerns that this could harm margin and arbitrage trading, thereby affecting market liquidity and efficiency.
Additionally, the tax rules also propose that investors cannot offset cryptocurrency losses with income from other sources or carry them forward to the next fiscal year, a provision permitted for other asset classes. This means that the government will collect taxes whenever investors make a profit on crypto, but will not offer any relief or benefit when investors are at a loss.
As a nascent sector, the crypto industry requires legislation and tax laws that support its growth and use and encourage innovation. But in India, the government may be trying to control the unfettered growth of the crypto industry over the years, rather than stimulating it.
The tax rules were supposed to bring clarity, but they only added more confusion. The government has refused to clarify the legal status of crypto for years by neither banning nor clarifying. India’s crypto community is on edge as suspense around the fate of crypto lingers and many exchanges are even considering leaving India.