By Sumit Gupta
The virtual digital assets (VDA) industry in India is on the cusp of a turning point, as the country’s millions of crypto investors, entrepreneurs, and talented pool of developers position it well to lead the way in Web3 innovation. However, to fully realize this potential, key challenges, such as the disparity in tax implications for domestic crypto exchanges compared to foreign exchanges, must be addressed.
The upcoming Union Budget 2023-24 presents an opportunity for the Indian government to establish a clear regulatory framework for the VDA industry and promote growth within the sector.
Is India gearing up for a more favorable tax regime for the VDA industry in 2023?
Key challenges that need redressal
One of the major issues is the disparity in tax implications for domestic crypto exchanges compared to foreign exchanges. This has led to a decline in trading activity and a lack of interest from retail investors. Additionally, the applicability of a TDS framework to foreign crypto exchanges remains unclear, leading to a migration of Indian retail investors to these foreign platforms, which now control nearly 80% of the total Indian VDA business. Understandably, Indian crypto exchanges are reeling under the double impact of lower trading activity hurting exchange revenues and higher tax levies, dissuading retail investors from entering this promising asset space.
To address these challenges and foster growth within the industry, a robust and supportive regulatory and disclosure framework is necessary. Private players within the industry have taken the initiative by voluntarily conducting extensive due diligence and reporting proof of reserves and liabilities to establish investors’ trust. The Bharat Web3 Association (BWA) has also been established to educate novice investors and represent the industry’s perspective on various sensitive matters related to VDAs.
Key hopes from Union Budget 2023-24
In the forthcoming Union Budget 2023-24, it is anticipated that there will be a reduction in TDS for VDAs to a level equivalent to Options in securities, as well as clarification on the applicability of TDS to foreign crypto exchanges. This would stimulate not only trading activity but also increase tax revenues for the government.
Addressing both investors and industry’s interests, the foremost request is to reduce the rate of TDS under Section 194S (1) from 1% to 0.01%, specifically including foreign exchanges in the scope of the TDS mandate under Section 194S. By including foreign crypto exchanges in the TDS ambit, the Indian government can shore up its tax revenues and fulfil the larger objective of tracking all VDA transactions. Furthermore, rather than imposing a flat 30% tax on income generated from the sale of VDAs, it would be prudent to subject them to a taxation regime that is on par with that for securities.
By taking inspiration from countries such as Switzerland and Singapore that have collaborated with private crypto players to develop nuanced regulatory frameworks, the Indian government can support the development of a flourishing and thriving Web3 ecosystem in India. This, in turn, can help India play a more significant role in the global Web3 industry.
Not only will this help India take on the reins of the ongoing Web3 revolution but also help the country surpass major economies like Germany and Japan in terms of GDP by virtue of the additional value created in the Indian economy.
It now remains to be seen if the Union Budget 2023-24 will soothe frayed investors’ nerves and act as a springboard for homegrown VDA-based businesses shaping the future of the Indian Web 3 ecosystem.
The author is co-founder and CEO, CoinDCX