India’s Crypto tax: No taxation without legitimization?
As the Covid-19 pandemic began, on 4 March 2020 the Supreme Court of India in Internet and Mobile Association of India declared that virtual currencies were ‘not illegal’. It did so by setting aside a 2018 Reserve Bank of India circular restricting RBI-regulated entities from dealing with anyone who deals with virtual currencies. Subsequently, on 1 February 2022 the finance minister in her budget speech propose a 30% tax on income from transfer of virtual digital assets with no deduction (except the cost of acquisition) of expenses. This was coupled with a proposal that losses from such transactions will not be liable to be offset against other income. Gifting such assets will also be taxable. On one hand, it appears that this development is directed towards indirectly regulating the transfers of crypto assets. On the other, the high rate of tax imposed raises the question -whether it is actually a prohibition disguised as regulation?
Is the Finance Minister’s budget speech tax announcement a logical next step to the Supreme Court’s decision - an inevitable legitimization of virtual currencies? Or, will it end up disincentivising the nascent industry? This piece weighs the pros and cons and argues that the answer may not be straightforward: the tax proposal may end up raising more questions than answers for the industry.
On the positive side, the move to tax virtual digital assets marks a shift away from the paternalistic and prohibitive attitude of regulators towards regulating crypto-currencies. Crypto-assets have been a cause of concern for the government because of their decentralised, pseudonymous nature which enables them to evade traditional (i.e., government recognized) frameworks of centralised control. These attributes raise key AML (anti-money laundering) and CFT (Countering the financing of terrorism) concerns, and also enable these assets to circumvent the extant AML, CFT and taxation regimes. In theory, the decision to tax transfers of virtual digital assets will enable the government to earn revenue while discouraging investments in these assets by creating disincentives for the ‘average Joe’ trader that’s looking to make quick profits.
On the negative side, taxing income from crypto currencies is likely to restructure the incentives that make crypto-currencies a haven for investors looking to turn a quick profit. This move will put a spoke in the wheels of investors despite being articulated as an indirect means of regulation. Given that the average investment per individual is about Rs.10,000 per month, this tax might operate as a surreptitious way of making investments in cryptocurrencies prohibitively costly, thereby disincentivising crypto traders.
The tax guidelines may be viewed as the logical first step towards legitimisation of the crypto-market in India. While cryptocurrencies will now be recognised as an asset class, the rate of taxation imposed is commensurate with earnings from game shows and lotteries ( 31.2%). Therefore, investments in cryptocurrencies will attract almost double the tax that comparable asset classes(for instance, stocks) do.
This will affect the micro-investors who might be disincentivised by the high rate of tax, making this move a roundabout way of attaining the goal of sequestering the crypto-market. If the recent ups and downs in the crypto market weren't sufficient for the faint-hearted micro-investors (or first time investors), the 30% tax will most likely have a chilling effect on them.
A quick comparison of the proposed tax to 2018 RBI circular that choked off crypto-exchanges from access to the banking channels, and the subsequent legislative proposals is instructive. The tax proposal purportedly marks a shift from isolation of crypto-markets to its integration and validation. However, treating crypto-assets at par with gambling and lotteries has an undertow of Government’s disapproval. Treating investments in crypto-assets comparably with speculative trading fails to account for the skill and know-how required to invest in crypto currencies. It disregards the innovation, promise and utility of crypto-assets, betraying the government’s unfavourable view of crypto-assets.
Still, there is lack of clarity and the guidelines which raises more questions than they answer.
-Does the tax imply that cryptocurrencies are legal?
-Does the definition of virtual digital assets as indicated in the guidelines covers other digital assets besides cryptocurrencies?
-How will transfers of cryptocurrencies between private wallets of the same individual be treated?
Despite the clarification that private cryptocurrencies (i.e. cryptocurrencies not backed by the RBI) will never be regarded as legal tender, it remains unclear whether cryptocurrencies are now considered legitimate as income tax does not discriminate income earned from legal and illegal means. Does this recognition imply authorisation or are cryptocurrencies still alegal at best?
Further, ‘virtual digital assets’ have been defined too broadly to include assets generated through ‘cryptographic means or otherwise’, which implies that the definition could possibly extend to assets like frequent flyer miles, website reward points etc. which do not come close to mirroring the characteristics and risks pertaining to crypto-assets.
In sum, due to the pre-existing regulatory vacuum, a move to tax cryptocurrencies provides a modicum of clarity to stakeholders. Even so, the move belies the claims of legitimisation of the crypto industry, leaving a larger question: could there be taxation without legitimization? The jury is still out on whether this development will encourage investors or chill their nascent enthusiasm.
†Tatheer Fatima is an Assistant Professor of Law at the School of Law, Mahindra University.