The wild world of cryptocurrencies has received the first hint of acceptance in India. Cryptos like Bitcoin and Ethereum will be heavily taxed, but not banned immediately. They would coexist with an RBI-backed ‘digital rupee’ to be launched in FY23 — both powered by the same technology, blockchain, offering the electronic ledger. Despite RBI’s strong reservations, the Budget has for the time being treated cryptos as ‘digital assets’ by proposing to tax the gains from crypto trading — though at a stiff rate of 30%, like lottery prize money.

The central bank digital currency (CBDC) — the digital form of the fiat currency bills in your wallets — can quicken transactions and dramatically transform payments with instantaneous settlement. It would be faster and cheaper than other modes of payment like RTGS, IMPS or UPI. Cryptos, however, will not be treated as currency but may survive as assets. Not only would crypto profits be taxed at double the rate than short-term stock gains, 1% would be deducted as tax at source from the proceeds of sale of cryptocurrency.

“Taxing does not automatically bring legitimacy,” said finance minister Nirmala Sitharaman during a select media interaction. The minister said the government would decide on it after the consultation process is over. “Crypto currency has become generic for anything using blockchain technology. Currency is only when an authority issues. Every individual cannot be mining currency. I cannot be sitting at home and mining currency. Is it not illicit? Currency cannot be issued by everybody. It has to be driven by the central bank. The RBI will come up with the digital currency. Outside of it, buying and selling is happening and profits are being made, nothing stops me from taxing it. Taxing that does not actually bring legitimacy. Profits are being made from transactions, which we are taxing,” she said. The minister pointed out that it cannot be said that a ban was off the table as a consultation process is on.

Globally, central banks have been exploring CBDCs since 2019, but only China has taken the plunge. But, unlike China which has clamped down on trading and mining of cryptocurrencies, India has paved the way for both.

“While a CBDC could provide benefits such as transparency, fraud monitoring, and reducing the illicit use of cash, one would like to know whether CBDC would be on a public blockchain, what would be the role of banks, and how the balance between government oversight and privacy would be struck. As far crypto goes, we have the first legislative definition in India, which may help in classification, but there are ambiguities around the definition, such as the treatment of stable coins and loyalty points,” said Jaideep Reddy, Technology lawyer with Nishith Desai Associates.

Crypto trading on multiple exchanges in India have caught the fancy of young investors in India since the Supreme Court lifted the RBI ban on banks letting customers buy and sell cryptos. There are more than 1.5 crore crypto investors, including wealthy punters trading on global exchanges. Cryptocurrency prices rose between 3.5 and 9% at 7 pm on bourses in India.

MORE CLARITY NEEDED
“There was confusion on whether the gains earned would be capital gains or business income. This has been set to rest by introducing a flat rate of 30% on gross basis taxation irrespective of the period of holding. The intent seems to bring taxation on digital assets on par with earnings in case of lottery receipts, winnings, etc. not allowing for any deductions for claims towards costs other than cost of purchase of the digital asset sold, allowances, losses, etc. The bill, though, is silent on indirect tax,” said Ashish Mehta, partner at the law firm Khaitan & Co.

Besides the high tax, cryptos come with other restrictions: for instance, a proprietary trading house cannot consider the salaries paid to its dealers as expenditure. Also, the gains from cryptos cannot be adjusted against losses from manufacturing or other activities to escape tax. It’s unclear whether gain from one crypto can be offset against loss from other coins. And, even as the government has laid down the first set of tax rules, there is regulatory ambiguity on cross-border trades on cryptos —- trading on an offshore exchange or transferring cryptos to another private wallet overseas through peer-to-peer transfers.

“How do you value a crypto which is received as a gift? How do you pay tax on that? It would have been better to simply propose a GST on cryptos,” said Mitil Chokshi, senior partner at Chokshi & Chokshi.

Despite high tax and unclear rules, the crypto community is excited. “Till now, the biggest concern was that crypto could be banned any day. Now, that has perhaps disappeared. People, who were awaiting clarity, may now invest. Also, institutional investors would be encouraged,” said Nischal Shetty, CEO of India’s largest crypto exchange WazirX. However, some in the crypto industry say that high taxes could prompt deep-pocketed investors to move trading volumes and positions to platforms abroad.