During the Feb 1 budget speech, the Indian finance minister announced a 30 percent tax on any income from the transfer of virtual digital assets.
With rumours of a blanket ban swirling, India’s crypto ecosystem had been keenly waiting for a hint of regulatory action from the government.
On Tuesday morning, they finally got some clarity.
In the annual budget presentation to parliament on February 1, Indian Finance Minister Nirmala Sitharaman announced there would be a 30 percent tax on any income from the transfer of virtual digital assets – in effect a capital gains tax.
The levy would apply to Non-Fungible Tokens (NFTs) in addition to crypto exchanges.
“There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime,” Sitharaman said in her two-hour long budgetary speech.
Sitharaman said that the “digital rupee” will likely be issued between 2022-23, the first time the Indian government has officially proposed a timeline on the launch of its central bank digital currency (CBDC).
She added that the CBDC will be “issued using blockchain and other technologies” and “will give a big boost to the economy”.
India’s central bank, the Reserve Bank of India (RBI), had indicated last year the launch of a pilot CBDC project in the fiscal year April 2022 to March 2023.
India is believed to have one of the biggest crypto markets in the world, home to an estimated 15-20 million investors.
Those sheer numbers mean the industry cannot be ignored and the market has become a growing revenue channel, as the crypto rush over the last year has seen an expansion of startups and exchanges across the country.
However, incidents of cryptocurrencies like Bitcoin being used for money laundering and “terrorism” have prompted calls for greater oversight of the budding industry.
Last November, Prime Minister Narendra Modi warned about the risk of cryptocurrencies ending up in the “wrong hands”, cautioning the technology’s potential for misuse as an instrument of conflict.
Paving the way for crypto adoption?
Leading up to the budgetary speech, India’s crypto industry had several demands, including a classification of cryptocurrencies, clarity on taxation, and a self-regulatory framework.
While Tuesday’s speech clarified the issue of tax, the formal classification of crypto – whether it will be considered an asset or a security, for example – is still unclear.
When asked later about taxing crypto transactions without any regulation in place, the finance minister said, “We have circulated a paper, inputs are coming in, public stakeholders are coming in, so regulation goes through that process.”
The words crypto or cryptocurrency were not directly referred to in the budget speech; the phrase “virtual digital asset” was used instead.
While the government’s announcement doesn’t mean crypto is now legal, many in the industry view it as a step towards greater legitimacy for cryptocurrencies in the country.
“India is finally on the path to legitimising the crypto sector in India,” said Nischal Shetty, co-founder and CEO of WazirX, one of India’s largest crypto exchanges.
Shetty claimed the move to launch a blockchain-powered digital rupee is “phenomenal” as it will “pave the way for crypto adoption,” adding that clarity on crypto taxation “will add the much-needed recognition to the crypto ecosystem of India.”
“You can’t tax something which is illegal. Hence, this is a very positive move by the government and is very good for the industry. If there are tax clarities in this space, more money is likely to come in,” said Sidharth Sogani, founder and CEO of cryptocurrency research organisation Crebaco.
While many believe the government is unlikely to ever accept the use of cryptos as private currencies, authorities are more likely to warm up to the idea of their use as financial assets.
“Cryptos should be classified as an asset class investment in India,” Ashish Singhal, the co-chair of the Blockchain and Crypto Assets Council said. “It is similarly regulated in many other countries, and almost all use cases of crypto are an investment and not payment.”
“Additionally, the Indian crypto industry needs a proper framework for the movement of funds, a rigorous KYC [Know Your Customer] procedure, and a proper reporting structure,” he said.
New Delhi also appears to be waiting for global consensus when it comes to crypto regulation.
Just last month, Modi called for international cooperation on cryptocurrencies, stating that challenges posed to nations by digital currencies like crypto could not be dealt with in isolation.
Meanwhile, Sitharaman told Parliament last year that “a new [cryptocurrencies] bill is in the works,” warning that “the risk of cryptocurrency and it going in the wrong hands is being monitored.”