The 2023 Union Budget is nearly here and the biggest question that’s haunting the mind of crypto enthusiasts is simple — how will the Finance Ministry treat the virtual digital assets (VDAs) sector this time around? While 2022 saw several important milestones for the crypto sector, from the taxation of gains to the introduction of a central bank digital currency (CBDC), the hard stance maintained by the Reserve Bank of India (RBI) against digital assets and the eagle-eyed scanning faced by homegrown crypto firms — especially following the FTX massacre — lends an air of uncertainty towards cryptocurrencies in India.
It should be noted that cryptocurrencies are still unregulated in India, and all crypto assets are clubbed under VDAs in the country. Let us understand the current crypto scenario in India before we take a look at what the industry expects from the upcoming budget.
First, let us take a look back at what was announced by Finance Minister Nirmala Sitharaman regarding cryptocurrencies in Union Budget 2022-23.
Taxation of crypto gains
During last year’s Budget session, Sitharaman proposed that all gains from the sale of VDAs will face a tax of 30 percent. It’s worth noting that there are no thresholds under which the VDA tax won’t be imposed. This means that even if a taxpayer’s total income is below the threshold limit of Rs 2.5 lakhs, gains will remain taxable.
Additionally, a TDS of 1 percent will be charged on all VDA transactions, which will be deducted by the crypto exchange that will credit or make payment to the seller.
Now, if we compare India’s tax structure to other nations, it might seem harsh or relaxed (given the country being compared to). However, the announcement of the taxation was generally welcomed by India’s crypto traders and investors, as it was seen as a sort of legitimisation of digital assets by the Centre.
Will the crypto bill finally be introduced in parliament?
It was largely expected that a crypto bill, which will bring in regulations and clarify the status of cryptocurrency in the country, would be introduced sometime last year. However, that didn’t happen either in the Budget session or even in the Winter or any other sessions so far.
As per Minister of State for Finance Pankaj Chaudhury, crypto assets are borderless by definition, and hence “require international collaboration to prevent regulatory arbitrage. Therefore, any legislation on the subject can be effective only with significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”
So, the government is yet to clarify when crypto legislation could be expected. However, the industry remains hopeful.
“It is possible that the government will introduce the crypto bill this year to set procedures and regulations as the demand for cryptos increases and several new companies are building around this ecosystem,” Edul Patel, CEO and co-founder of Mudrex, told ABP Live.
RBI’s hard stance
RBI Governor Shaktikanta Das remains a vocal opponent of cryptocurrencies, going to the extent of claiming that the next major financial crisis will come from private cryptocurrencies if they continue to remain unchecked. Das was referring to the recent FTX fiasco, where mishandling of customers’ money by former CEO Sam Bankman-Fried led to a major meltdown of crypto prices, leading to a wipeout of over $40 billion from the crypto market. “After the episode of FTX, I don’t think we need to say anything more,” Das said.
“Change in value of any so-called product is the function of the market, but unlike any other asset, our main concern about crypto is that it doesn’t have any underlying [value] whatsoever,” Das said at an event in December last year. “As a term, cryptocurrency is a fashionable way of describing what is otherwise a 100 percent speculative activity.”
Das said that private cryptocurrencies were created to bypass the system, to find a way around central bank currencies. “There’s no credible argument about what public good it does, or what public purpose it serves,” noted Das as he said that private cryptocurrencies are a completely speculative activity. “I still hold the view it should be prohibited.”
“If you allow it to grow, mark my words, the next financial crisis will come from private cryptocurrencies,” Das said.
This comes at a time when the RBI introduced its own CBDC, the Digital Rupee (e₹), for both retail and wholesale sector.
Speaking about the advantages of the e₹, Das said that the digital rupee will help ease logistics, by eliminating the cost of printing notes and other such elements. The RBI chief said that the digital rupee also offers an automatic sweep-in and sweep-out facility, which enables users to easily withdraw e₹ and also drop it back in your bank account as and when needed.
Das said that the digital rupee will eliminate banks as intermediaries in digital transactions, as seen in the case of the UPI mode of payment. He added that CBDC will also help in transactions between nations as it will enable instant remittance.
By introducing the e₹, India has joined a long list of nations which are experimenting with their own CBDCs.
Prohibiting crypto a priority for India during G20 presidency?
As per the RBI, under India’s G20 presidency, one of the priorities is to develop a framework for global regulation, including the possibility of prohibition of unbacked crypto assets, stablecoins, and decentralised finance (DeFi).
In its latest Financial Stability Report (FSB), the regulator said that crypto assets are highly volatile. “The collapse and bankruptcy of the crypto exchange FTX and subsequent sell-off in the crypto assets market have highlighted the inherent vulnerabilities in the crypto ecosystem,” as per the report.
The RBI’s report recommends the promotion of international consistency in regulatory and supervisory approaches, which are grounded in the principle of a “same activity, same risk, same regulation” approach.
The report further added, “The framework proposes that authorities should have appropriate powers, tools and resources to regulate, supervise, and oversee crypto assets activities and markets, both domestically and internationally, proportionate to the financial stability risk they pose,” the RBI report mentioned. “Furthermore, contrary to claims that they are an alternative source of value due to inflation hedging benefits, crypto assets value has fallen even as inflation rose,” the report added.
It should be noted that so far, although crypto assets market remains volatile, there have not yet been any spillovers onto the stability of the formal financial system.
“To address potential future financial stability risks and to protect consumers and investors, it is important to arrive at a common approach to crypto assets,” said the Central Bank.
So, here is where India stands in terms of crypto so far. Now comes the question:
What to expect from the upcoming budget?
As per a recent study released by Delhi-based think tank Esya Centre, India’s current tax architecture may lead to a loss of roughly Rs 99.3 lakh crores of local exchange trade volume by 2027. The study noted that since the announcement of the 30 percent tax on crypto gains, a cumulative trade volume of Rs 32,000 crores has shifted from Indian exchanges to foreign counterparts.
So, it remains to be seen if the Centre would further amend the taxes on crypto income. However, there is no way to be certain as of yet. “There may be a chance that the government might consider and offset losses with gains. Anything beyond these seems unlikely at the moment,” Patel said.
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“Considering the global situation and the collapse of some exchanges in the previous year, as well as the lack of widespread understanding of the technology and cryptocurrency, it is likely that the government will take a progressive approach in order to better safeguard user funds against money laundering and fraudulent activities,” Patel added. “It would be beneficial for the government to offset losses with gains, as this could encourage more Indian investors to consider investing in crypto as an asset.”
“As a member of the cryptocurrency community in India, I am hoping for clarity on taxation and regulatory issues in the upcoming Union Budget. It is important for the sector to have progressive guidelines and a clear understanding of how cryptocurrencies will be classified based on their use cases,” Sathvik Vishwanath, CEO and co-founder of Unocoin, told ABP Live.
“There are also many questions about the applicable tax rates, TDS/TCS, and GST implications for the sale and purchase of cryptocurrencies, and I hope that these will be addressed in the Budget Session of Parliament,” Vishwanath added.
Prashant Kumar, founder of weTrade, said, “This budget, the government should consider cryptocurrencies closer to other equity classes and amend the taxes that were announced in the last budget. In this current financial environment, we are hoping for some positive announcements for the sector.”
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.