The Government of India has passed a much-awaited and controversial bill to bring crypto under a new sophisticated taxation system. The new bill, passed by a majority from the lower parliament house, seeks to impose specific taxes on crypto transactions. Under this new taxation system for digital assets, Indians would be required to pay a straight 30% tax on gains made through crypto. Furthermore, the Indian government levied a 1% Tax Deduction at Source (TDS) for every crypto transaction and trade.
The Indian government has not stopped with 30% capital gain tax and 1% of TDS; Indian citizens would not be able to offset their losses under this law. In other words, any loss occurred in trade will not be offset by the gains you have made, even though your loss surpasses the gains. This unreasonable bill has been passed despite a massive uproar by the Indian crypto community and leaders. A petition raised to change.org to bring the Indian government’s attention to the significant impact of this unfair crypto tax has gained a massive 1,02,061 signatures.
With this new ‘crypto tax,’ the Indian government has cleverly stifled Indian users from indulging in crypto while escaping from the stigma of being a conservative government by banning crypto.
In view of this new tax, the Founder of the Indian crypto exchange, WazirX, quotes, “1% TDS is an example of killing the golden goose”.
Although it’s evident it will hamper the growing crypto industry in India, let’s look over the immediate and potential long-term outcome of this bill.
Crypto: A sin for Indian Retail Investors
A large part of the Indian population indulged in crypto is retail investors and traders of young age. According to Economictimes, In 2021, India has become the country with the largest trade volume. An estimated 100.7 million Indians, nearly 7.3% of the total population, own cryptocurrency. The crypto tax will mainly and immediately impact retail investors. Users under this group are mainly swing and daily traders, holders, and middle-class people who want to get an extra return on their investment against a meager 7% return offered by the Indian banks.
Investing money in Bitcoin is not a sin. If we take a look across even the Asian and middle east countries, most governments have a soft spot for crypto. Recently, Israelian bank Leumi enabled cryptocurrency trading through its official digital platforms. While the world is working to promote and utilize this revolutionary technology, the Indian government is trying to portray Bitcoin and Crypto as a Sin. And the Government of India(GOI) has further disclosed its hidden agenda behind this step by explicitly putting the crypto transactions in the category of ‘Betting and Gambling.’
Now, in India, a profitable trade would be considered as ‘Winning a Bet or a lottery.’
The 30% tax and analogy of betting for crypto trading will directly impact the retail investors who are not able to even make a successful 30% gain. Furthermore, the resemblance of Bitcoin with gambling will deter the young population from putting their hands in this growing technology.
1% TDS: A nightmare for crypto-traders
1% TDS on every crypto trade/transaction will cripple the crypto traders. As in just 1 trade, an Indian trader will have to pay a 2% tax irrespective of the loss or profit that occurred in the trade. The forced 1% TDS will hamper and directly attack the capital of daily crypto traders.
Wazirx Founder illustrates how the 1% TDS will prevent traders from trading and result in less tax income for the Indian government, “By locking this $900M, the Gov would cripple traders and prevent them from trading due to lack of capital Effectively, this would drastically reduce the potential to earn profit This in turn would affect the $100M in income tax earnings of the government “
Stifle Blockchain Projects Growth
Blockchain technology is still in its early phase and has yet to release its full potential. And major countries are bringing regulations in favor of crypto to promote the blockchain and attract more crypto companies to establish their business. Ukraine, a country going through war, passed a law to regulate crypto and help accommodate and flourish blockchain technology.
India is going backward in terms of promoting future tech such as blockchain. Referring to the attempt of GOI to stifle blockchain in the country, Member of Parliament Panaki Mishra said, “Today to Ban Crypto is equivalent to banning the internet. It is an idea whose time has come.”
Under this new rule, Indian crypto startups will be forced to move their business to somewhere else where the laws are favorable to the growth of crypto and blockchain. Polygon, formerly known as Matic network, is one such crypto startup. Its native token, MATIC, has a whopping $15 billion Marketcap. The migration of such crypto firms from India will only harm the Indian economy and set a negative example for new blockchain startups.
Instead of offering a breeding ground to the blockchain projects, the new crypto taxation will result in a slow death of crypto in India.
The Aftermath of new Crypto Tax
The total crypto assets held by India are worth $5.3 billion, which is more than the GDP of Montenegro. In addition, India witnessed a whopping $100 billion trading volume in 2021. Now, the ridiculous 30% crypto tax will drive these figures in a downward direction. The trading volume would gradually decrease with small players being forced out of the market. And the Indian centralized crypto exchanges will feel the heat immediately after implementing this new law.
While no official statements are issued by any crypto exchanges over the new crypto tax yet, in foresight, they will have no choice but to co-operate with the government by disclosing the trading data with the Indian government. All the exchanges that are KYC compliant will have to ask the users for a PAN number to capture the taxes. Under these circumstances, there could be a steep decline in trading volume across the centralized exchanges.
Another possibility is a significant surge in the outflow of funds from an Indian exchange to foreign/global exchange, which does not require a mandatory KYC for trading. As noted by Nischal Shetty, “1% TDS and 30% tax can result in cascading participation on Indian exchanges and lead to a rise in capital outflow to foreign exchanges”.
DEX or Decentralized Exchanges will be another gainer from this conservative stance of the Indian finance ministry. Such exchanges do not require users to divulge their private information; they can be a promising platform to trade crypto without extortion by the Government of India.