Cypto industry eyes regulatory clarity, classification as asset class, smart tax policies in Interim Budget 2024

The Union Budget 2022 while recognising and defining cryptos as an asset class for the first time also introduced a three-pronged tax provision on their transactions. A high rate of 1 per cent Tax Deducted at Source (TDS) on the transfer of Virtual Digital Assets (VDAs), a flat 30 per cent tax on gains, and disallowing offsetting and carry forward of losses have had unintended consequences on the burgeoning Web3 sector in India.

Some empirical studies point to a massive shift in Indian VDA users to non-compliant offshore virtual asset exchanges to trade, putting themselves and their investments at risk. Such large volumes of VDA activity by Indian users remaining outside the government radar can also potentially impact anti-money laundering and terror-financing investigations and enforcement.

The interim Budget in February is a fresh opportunity for the government to balance the need to have oversight on the VDA sector and also support the growth and expansion of Web3 in India. If the intention was to track all VDA transactions with 1 per cent TDS, the same can be achieved even with 0.01 per cent rate. Even more now, as all VDA transactions have come under the ambit of the Prevention of Money Laundering (PMLA) Act and Rules from March 2023. Several Indian exchanges including CoinSwitch are registered with the Financial Intelligence Unit to fully comply with India’s AML/CFT rules.

Besides reducing the rate of TDS, the government should consider allowing offsetting of losses with VDA gains and treating income from VDAs on par with other capital assets.

Today, more than 80 per cent of the G20 and major financial hubs are providing increasing regulatory clarity on crypto. Recognizing the growing momentum for crypto assets in India and building on its leadership position in the G20, the Government should also announce a robust regulatory framework for VDAs in the upcoming Budget.

A friendly tax regime along with a robust regulatory framework that fosters responsible innovation and shields consumers will propel India to be a global hub for Web3 activity and also help realise the $5-trillion economy goals by 2027-28.

(The author of this article is Venkatesh R, Senior Vice-President and Public Policy Head, CoinSwitch)