New Tax Rule is Detrimental for India’s Crypto Industry

New Tax Rule is Detrimental for India’s Crypto Industry 

 

The government's clarification of allowing losses incurred in a particular digital asset to be set off against income from another version of a crypto holding is "detrimental to India's crypto industry and the millions who have invested in this emerging asset class," said Ashish Singhal, co-founder and CEO of CoinSwitch, one of India's top crypto exchanges.

The government will not enable infrastructure costs to be deducted from taxes. Mining of crypto assets, on the other hand, will not be counted as a cost of purchase, according to Minister of State for Finance Pankaj Chaudhary, had clarified in parliament on Monday.

The minister's clarification is a further setback for an industry that was hit with a hefty 30 per cent tax rate on gains from digital asset transfers in last month's budget. Despite an increase in trade volumes, the Reserve Bank of India and the government remain suspicious of the industry, fearing that digital currencies might be used for money laundering, terrorist financing, and price volatility.

"This is detrimental for India's crypto industry and the millions invested in this emerging asset class. We fear the lack of provision to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of the tax," said Mr Singhal.

The budget recognised virtual digital assets (VDAs) as an emerging asset class. Therefore, a natural course of action would have been progressively bringing the regulations at par with other asset classes. Instead, today, we have taken a step backwards with this clarification. If a regressive provision such as this had been applicable in equities, it would have discouraged retail investors from participating," he added.

Starting April 1, India's crypto-asset tax regime will be phased in over the course of the fiscal year. Provisions concerning the 30% tax will take effect at the start of the fiscal year, while provisions concerning the 1% Tax Deducted at Source (TDS) will take effect on July 1, 2022.

A bill regulating cryptocurrency is still in the works. While the RBI has expressed worries and stated that it supports a comprehensive prohibition, the government has postponed the cryptocurrency and digital asset legislation, which has been in the works for more than a year.

The Cryptocurrency and Regulation of Official Digital Currency Bill, in its current form, aims to ban all cryptocurrencies as a payment method in India, with the exception of a few private coins to promote underlying technologies, while also allowing the Reserve Bank of India to establish an official digital currency.

The RBI will introduce the digital rupee within the next year, according to the Finance Minister's budget speech. A crackdown on cryptocurrency ads, which authorities claim mislead the public, was also urged in the proposal. Disclaimers will be required for risky crypto ads, according to a private body.

However, the number of digital asset investors in India has increased; most are optimistic that the final draft would allow more flexibility than a full ban. Investors and prominent cryptocurrency exchanges in India have praised the intentions to regulate the cryptocurrency sector and legally assist in the development of the underlying technologies.

Experts have also stated that the delay in India's cryptocurrency law is reasonable due to the intricacy of the technology and its impact on the broader financial systems. Still, the government's latest clarification on the digital assets tax, which states that infrastructure costs paid while mining crypto assets will not be counted as a cost of acquisition, is a setback for an industry that was hit with a high tax rate.