India's Finance Minister Nirmala Sitharaman made two major cryptocurrency-related announcements as she unveiled the nation's budget for next year. The first was that the government would introduce a new set of regulations for virtual digital assets, and second, India intends to introduce a digital rupee (a central bank digital currency, or CBDC) within the financial year, the first reference to a time frame. The news has left many citizens curious about cryptocurrencies wondering what this means for them. Is crypto investment legal in India? How much do citizens have to pay in taxes? Can cryptocurrencies be banned? How do non-fungible tokens (NFTs) fit into India's regulatory framework? To answer these questions, CoinDesk spoke with more than 20 experts, including government officials, lawyers, policy experts, exchange executives and tax professionals.
The biggest conclusion is that “now, as an investor, I am no longer going to jail as a cryptocurrency holder,” said Edul Patel, CEO of Mudrex, a crypto asset management platform. The Finance Minister's use of the phrase “virtual digital asset” in her speech earlier this month points to why many in the industry, and the media covering it, are not saying that cryptocurrencies are legal. In plain English, this means “virtual digital asset” is the terminology that the government uses for all cryptocurrencies and NFTs. The word “digital” is used because cryptocurrencies or NFTs are a digital representation and not a legal tender that you can hold in your hand like a 100 rupee note.
The government had previously reflected on the use of the phrase “crypto assets” to mean that cryptocurrencies are not legal tender and that you cannot buy or sell things with them, but rather are held as an asset for investment purposes. When India announced its new proposed rules, Binance tweeted that “cryptocurrencies have just been legal in India.” However, this was not true. In interactions with the media following the announcement, several government officials said that the new proposals do not mean that cryptocurrencies are legal. Somanathan told Bloomberg that it's not illegal to buy or sell crypto in India.
News agency ANI quoted Somanathan as saying that Bitcoin, Ethereum or NFT will never become legal tender. Crypto assets are assets whose value will be determined between two people. You can buy gold, diamonds, crypto, but that won't have the government-authorized value. Similarly, Treasury Secretary Tarun Bajaj explained it better in an interview saying that cryptocurrency profits were always subject to taxation, but the new rule “will bring certainty in the taxation of cryptocurrencies.” However, this new rule “does not convey anything about its legality that would come out once the bill (on the regulation of such assets) is introduced in Parliament.
Mohapatra also said that the act of collecting a tax should not be equated with conferring legitimacy on cryptocurrencies, according to Business Today. A senior lawyer who requested anonymity because he has worked with the government on crypto regulations said the government has taken the view that everything is taxable but not everything is allowed. Smuggled illegal products are also subject to taxation. When CoinDesk asked Binance about these explanations from government officials, a spokesman referred CoinDesk to the statements of the Reserve Bank of India and the budget speech. Cryptocurrency investors will have to pay 30% tax on all transactions. In addition, some investors may owe an additional 1% tax under certain circumstances. The 30% tax will be applied every time an investor makes a capital gain. On the contrary, the 1% tax will only apply in certain situations.
However, international transactions may be exempt because the government has not yet defined how taxes would work if the payee is abroad. If a cryptocurrency investor sends 100 rupees to an exchange and buys bitcoins with it and doubles its value, the investor makes a profit of 100 rupees. According to the tax rule now announced, the investor will be charged 30% on the profit of 100 rupees. Therefore, the investor will keep 170 rupees. The 1% TDS tax will be applied to the sales value (in this case 200 rupees) at the time of sale. But whether or not taxes deducted at source will be collected depends on how much investors trade on exchanges and who they are. Exchanges are responsible for submitting TDS taxes to the government on a monthly basis while 30% tax is responsibility of individuals and their public accountants. The government has not yet determined how to implement 1% tax when buyer or recipient of cryptocurrency transaction is in another country.
The old income tax law would continue to apply to crypto earnings for past decade. Bhasin said implementing 1% TDS would be difficult for retail transactions while Bal believes that high tax rate has been used “as disincentive for low-income people” and “tax deductible at source” (TDS) mechanism has been used to understand scope of activity in cryptocurrency market. Across all exchanges 1% TDS is biggest problem as they don't know if 1% TDS will be present in every transaction and their concern is that if that is case high-net-worth individuals will stop trading cryptocurrencies in India. An executive said that “30% slab” is set for virtual digital assets but definition of virtual digital assets needs to be clarified and ideally should be different for different use case scenarios. NFTs decentralized finance and metaverse tokens should have different tax brackets because they could have different uses than just speculative trading executive said. The industry is preparing a proposal which it hopes will help clarify some of these issues and provide clarity on how taxes should be applied when dealing with virtual digital assets.