India to Tax Cryptocurrency Profits 30%, Legitimizes Virtual Assets

Nirmala Sitharaman, India’s Finance Minister, stated that profits from “virtual digital assets” would be taxed at 30% while presenting the Union Budget for 2022. The Union Budget declares the Indian Government’s spending and taxation policy for the next fiscal year and would come into effect from 1st April 2022.

While being a minor announcement in the grand scheme of things, it moves the Indian crypto/DeFi sector out of the explicitly illegal zone. But how will this affect India’s contributions to the blockchain ecosystems?

From Calls for Outright Bans to Regulation

It seems that politicians are starting to realize that cryptocurrencies cannot be technologically banned. After President Putin urged the Central Bank of Russia (CBR) to take a conciliatory approach, India seems to be following suit. Previously, the Reserve Bank of India (RBI) had called for crypto bans on multiple occasions.

In 2018, the RBI issued a notice that prohibited all banks from dealing with cryptocurrency-related transactions. However, the Supreme Court of India lifted the ban in 2020, after petitions and efforts from the crypto community in India. Nischal Shetty, the founder and CEO of WazirX, started the #IndiaWantsCrypto campaign, documenting crypto’s evolution in the subcontinent.

Day 1189

Crypto is finally on the right path in India 🇮🇳

1188 days of campaigning has been worth it. I’m glad I played my part along with YOU!

Thank you for being part of this historic campaign.

It’s time to start the next phase

New tweet, new chapter#IndiaWantsCrypto

— Nischal (WazirX) ⚡️ (@NischalShetty) February 2, 2022

Another regulatory worry was related to a draft bill titled “Cryptocurrency and Regulation of Official Digital Currency Bill”, which sought to ban all “private” cryptocurrencies in favor of its upcoming CBDC deployment.

Instead of an outright ban, the Indian Finance Minister announced a hefty 30% tax on income derived from any virtual asset, including cryptocurrencies. The minister attributed the shift in policy to massive trading volume increases in digital assets.

“There has been a phenomenal increase in transaction in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime,”

At the same time, the minister has more precisely outlined when the digital rupee will see the light of day. Not to be overshadowed by the Chinese digital yuan, which has been used by 139 million people up to September, the Indian digital rupee should be issued by 2023 at the latest.

Is India Hobbling its Crypto Sector with a 30% Tax?

Overall, this is good news because India will no longer be in the regulatory grey zone, or on the borderline of being banned. More investors could now potentially see cryptocurrency as a serious asset class, not something that could get outlawed anytime. Nonetheless, a 30% tax on any crypto-related income is on the higher end.

To illustrate, the US has seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The point of such a progressive system is to diversify income taxation according to the amounts earned. Likewise, cryptocurrencies are subject to capital gains tax within that range, if profit was made on crypto assets held under one year.

Going into effect from April 1st, 2023, as it currently stands, the Indian bill introduces a 30% tax rate on the total income, without offering deductions. Furthermore, the new bill is so harsh that it taxes crypto transfers as well.

“However, no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act while computing income from transfer of such asset.”

When taking into account that, in the US, long-term capital gains, such as taxes on stocks, are subject to three brackets (0%, 15%, and 20%), this means that the Indian flat 30% tax rate is unusually high. The government is clearly ramping up its tax collection, but at what long-term cost?

It bears remembering that one of Ethereum’s largest layer 2 scaling solutions, Polygon (MATIC), was developed by Indians, currently holding $4.91 billion TVL. Thus far, Polygon co-founder Sandeep Nailwal reacted by retweeting the following:

Likewise, the founder of Catax, an Indian platform specialized in crypto taxation and auditing, sees this as a positive move.  

In the thread, Gaurav Mehta hinted that the reason for this new shift in policy is the government’s inability to oversee the variety of digital assets present in the ecosystem, as well as their use cases. However, it is dubious if the newly proposed 30% tax hike has much weight.

According to the Central Board of Direct Taxes (CBDT), there are 14.6 million taxpayers in India, out of 1.3 billion. That is to say, out of 57.8 million who have filed income tax returns for 2018-19, 43.2 million reported income under the taxable bracket.

This certainly puts things into perspective. Effectively, 4% of taxpayers account for 60% of India’s entire tax revenue.

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Breakdown of India’s Involvement in Blockchain Assets

As “country x bans crypto” FUDs go, India has been on the lower level of significance. This is due to a number of reasons. Although India rivals China in population count, at 1.38 billion, its crypto involvement has been quite modest by comparison. First of all, India’s contribution to the Bitcoin hashrate is at the very bottom, at 0.05%, according to CCAF.

Likewise, despite having four times the population of the USA, India is behind with only 7.3% of citizens holding cryptocurrency, according to Triple-A report. Based on the demographic breakdown of crypto holders, ownership of blockchain assets is still highly stratified in India:

• 80% of Indian crypto holders are male, with a 300% increase in female users from 2020 to 2021.
  
• 70% of crypto users are under 30 years old, based on CoinDCX and WazirX data, India’s two largest crypto exchanges.

WazirX, India’s equivalent to Coinbase and bought by Binance in 2019, recorded a $43 billion trading volume for 2021. Although this is a 17x increase from the previous year, it is merely 5.3% of volume Coinbase achieved in H1 2021 alone, at $797 billion.

When it comes to DeFi smart contracts and dApp visits, India ranks 12th, just behind Vietnam, which has 14x fewer inhabitants.

Considering all of these factors, the reason why India went the 30% flat tax rate route is that only a fraction of a tiny minority will offer to pay it. While crypto regulation could potentially open up the market to new investors, the high tax rates with the lack of rules provided for traditional investments might still deter adoption.

With such a lax tax system, do you think India’s digital rupee will achieve success or fail to launch? Let us know in the comments below.