India’s parliament announced last Friday that it passed the Finance Bill 2022, which has introduced taxation on digital assets including cryptocurrencies.
The new law has imposed a 30% capital gains tax on crypto transactions, putting digital assets in the same taxation category as traditional stocks.
The Lower House approved the Finance Bill after accepting 39 official amendments and rejecting the amendments proposed by the opposition party which intended to veto the vote.
Indian Finance Minister Nirmala Sitharaman succeeded at getting her crypto tax proposal passed. This means that Indians will start paying capital gains taxes of 30% on crypto transactions effective 1st April, next month.
Sitharaman defended the passage of the Finance Bill saying that India was probably the only nation that did not resort to new taxes to fund the recovery of the economy hit by the Covid-19 pandemic.
While referring to an OECD report, Sitharaman said that as many as 32 nations have increased the tax rates after the pandemic. "Instead, we put more money where the multiplier effect would be maximum," she mentioned, justifying the Budget's focus on raising capital expenditure.
Besides the capital gains tax, Indians selling and purchasing cryptocurrencies will have to pay a 1% tax deducted at source (TDS), as well as taxes on crypto gifts, with no ability to take deductions for losses. While the TDS will begin on July 1, the crypto taxes will come into effect on April 1.
The passage of the controversial tax proposal sparked disappointment and uproar among players in the country's crypto industry.
“This is not conducive for the government or the crypto ecosystem of India, it is poised to do more harm than good," Nischal Shetty, the co-founder and CEO of WazirX, one of India’s largest cryptocurrency exchanges, said.
“Witnessing no amendments in the crypto taxation policies have discouraged firms and investors from investing in the volatile market. This will hamper the overall growth of the sector by reducing mass adoption and its validation,” said Abhay Aggarwal, CEO and founder of NFT marketplace Colexion.
However, some industry experts see a potential benefit of the new tax law. Lennix Lai, director of OKX, stated: “a tax on certain assets indicates that those assets are recognized as a tradable asset class by the regulator. That gives the industry a lot more clarity on the legal status of crypto and its derived income. Hence it’s good news for the industry in India with respect to building a more regulated operating environment for crypto.”
The Legality of Private Cryptocurrencies in the Market
In the budget plan presented to the parliament early last month, Finance Minister Nirmala Sitharaman announced the proposal declaring crypto assets, non-fungible tokens and any other asset are under ‘virtual digital assets’ to be subjected to gains tax, which is similar to stocks in the equity market.
Sitharaman also clarified that a decision on "banning or not banning" cryptocurrencies will be taken after consultations. She explained that the government's move to tax a 30% tax on gains from cryptocurrencies has nothing to do with the legality of private cryptocurrencies in the market. Referring to the profits coming from transactions in crypto coins, the finance minister said that "(Whether it is) legitimate or illegitimate, it is a different question, but I will tax because it is a sovereign right to tax".
Sitharaman was responding to the questions raised by Congress member Chhaya Verma who had asked about the legitimacy of taxing cryptocurrency.
Meanwhile, Reserve Bank of India (RBI) governor Shaktikanta Das has repeatedly cautioned investors from investing their funds in cryptocurrencies. Last month, while announcing the monetary policy, Das said that private cryptocurrencies are a threat to macroeconomic and financial stability.
In February last year, after a post-Budget 2022 interaction with industry leaders, Finance Secretary T V Somanathan stated that cryptocurrency will never be a legal tender. Somanathan elaborated that just like diamond and gold, despite being valuable, are not legal tender, private crypto coins too will never be legal tender.
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