A brake on the Indian crypto-industry

Rapid technological advancements have led to the emergence of a new asset class: crypto-assets. Built on blockchain technology, these have captured the attention of tech pioneers, investors, businesses, and consumers given their revolutionary and ubiquitous potential.

In recent years, following the establishment of crypto exchanges in India, there has been an increased momentum in crypto-asset transactions and a significant increase in the number of investors. Recognizing the increasing volume of crypto-trading in India, the government has introduced a specific tax regime for Virtual Digital Assets (VDAs) in the Finance Act 2022. The provisions of the VDA impose a 30% tax on their transfer, without any deduction except for the cost of acquiring the VDA. It also avoids offsetting losses against gains, which is a bit too harsh. The levy of a 30% tax and a ban on loss offsetting is a significant deterrent to investors and has already seen volumes on crypto exchanges take a hit. It should be noted that even losses from speculative equity trading can be offset by speculative income; therefore, it may be justified to treat VDAs on an equal footing.

“Acquisition cost”, the only permitted deduction from ARV earnings, has not been defined, leaving room for interpretation and resulting disputes. Additionally, a VDA has been defined to include code, i.e. the number or token generated by cryptographic or other means. This open definition has raised concerns that the 30% tax will also apply to other non-encrypted digital assets such as loyalty points, airline miles, coupons, etc. to be undertaken by the VDA buyer, not only creates a onerous obligation for retail investors, but also has a stifling impact on liquidity. This situation is compounded by the practical difficulties faced by buyers in complying with the provisions of the TDS due to the anonymity of the seller, the volatility and the instantaneous nature of crypto transactions. The government should consider easing the burden of TDS compliance for retail investors by moving TDS compliances to crypto exchanges. Under the VDA’s gift tax provisions, the gift of crypto-assets may also result in a 30% tax in the hands of the recipient. In the absence of valuation rules, ambiguity arises over the “value” of the crypto-asset on which taxes must be paid. The government should prescribe appropriate valuation rules and also allow the deduction of a value such as the cost of acquisition at the time of subsequent sale.

NFT is a digital token that represents ownership of a unique digital or physical asset, which can be stored and traded on the blockchain. While the definition of VDA for tax purposes is intended to include NFTs, the category of NFT to be covered by the definition of VDA has not yet been notified. Since NFTs are only a title record of the underlying asset on the blockchain, it may not be justified to equate NFTs with other VDAs from a tax perspective. The taxation of NFTs should follow the taxation of the underlying asset. For example, the sale of a physical painting held as a fixed asset by an investor attracts long-term capital gains at 20%. The mere fact that the investor tokenizes the painting and sells it as an NFT should not change the treatment and result in a 30% criminal tax.

Other jurisdictions have taken a similar approach to taxing NFTs. Singapore has developed detailed guidelines on the taxation of digital tokens. He specifically clarified that the taxation of NFTs will continue to be governed by the normal taxation rules in force. Similarly, it is important to note that the United States seeks to treat “virtual currencies” equally as “property” and to apply general tax principles to the taxation of property, rather than introducing a punitive tax regime. specific. A gross tax of 30% is a blow to the nascent NFT industry and a chilling effect on innovation and technological development in India. Given the potential opportunities that NFTs present for the economy, including employment, the government should consider excluding NFTs from the scope of the VDA since the current regime already provides an effective taxation mechanism for this asset class.

While the government’s objective with the VDA provisions was to bring clarity and streamline the taxation of VDA transactions in India, the provisions have created uncertainty and hindered the growth of the Indian crypto industry and NFTs. As countries introduce inclusive policies for this asset class, Indian businesses and entrepreneurs could shift their base to more conducive jurisdictions, accelerating the brain drain of Indian tech talent. Strict tax measures would also discourage trading on Indian exchanges, potentially shifting transactions to non-compliant foreign exchanges or the unorganized market, thus defeating the very purpose of the tax itself.

This tax policy can also hinder the innovation and development of blockchain technology in India. The Indian government and the financial industry have been early adopters and are exploring more use cases for this technology. With the right governance policies, India can attract FDI, generate jobs, create wealth, and be at the forefront of the global blockchain industry.

The author is the tax leader of EY India
Views are personal

Co-authored with Anand Jain, tax partner, EY

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