By Ramesh Bafna
Crypto is a rare gem in the Indian tech landscape. Rarely has India been able to develop and scale up homegrown startups and cutting-edge tech solutions in lockstep with Western counterparts. India has had great success in the last two decades in establishing a strong IT industry and, later, an internet services industry. Yet, we have lagged behind in adopting and shaping breakthrough technologies—be it semiconductors or smartphones.
On crypto, however, our startups have taken the unchartered route: To build products and services that rival global peers. Even in these early days of crypto, Indian platforms have been able to scale up and cater to the needs of the millions of users. India has built unicorns in the crypto investment space as well as in the crypto infrastructure sector. This has taken shape hand-in-hand with the digital transformation of India. The result: India was ranked fourth in the world in crypto adoption on purchasing power parity terms by an international analytical firm, accounting for $172 billion in crypto transactions between July 2021 through June 2022.
Last year’s Union Budget acknowledged this growing adoption by defining, for the first time, what constitutes a Virtual Digital Asset, or VDA. The Finance Act 2022 also established a tax structure for VDAs. Clarity on taxes on crypto was much needed, and the budget offered that. But beyond this relief, the crypto investors were burdened with a tax structure not comparable with other asset classes.
The flat 30% tax on profits came with no basic exemption or categorization into long-term and short-term capital gains based on the period of holding, nor did it allow investors to carry forward or offset losses. More significantly, the TDS of 1% at every sell transaction had a compounding effect on high-frequency traders—the source of liquidity in the market—with capital getting locked up at every trade.
Nearly a year on, it has become clear that these prohibitive measures have had a counterintuitive impact: Instead of bringing about more transparency and compliance in crypto transactions in India, they have unwittingly incentivized users to move to offshore exchanges and grey markets. A recent study by the Esya Centre and Taxsutra found a shift of cumulative trade volume of around INR 32,000 crores from domestic crypto startups to foreign exchanges between February and October 2022.
This has serious implication: Loss of revenue to the government, loss of oversight of crypto transactions, and singficantly exposing users to the offshore risk. Our hope is that the government would course correct and introduce taxes that incentivize users to stay compliant and within our jurisdiction. Better taxes lead to better compliance.
The author is CFO, CoinSwitch