Cryptocurrency and its future in India

Since bitcoin's creation in 2009, cryptocurrency markets have evolved gradually. Cryptocurrency is a high-risk investment and its price swings significantly. In 2021, Crypto's trading volumes witness remarkable growth, hitting all-time highs. With the rapid growth of such transactions, there was a greater need to bring streamlined guidelines for such uncertain transactions.

In the last 2 years, several agencies have raised alarming concerns on the unregulated crypto market but no clear cut framework was provided by the government. Though the current union budget remained silent as far as the regulatory mechanism of such digital assets is considered, it has undertaken a slew of taxation measures in the direction of its regulation. The government have moved the long way from the point of a blanket ban to a place where its position is vague. In union budget 2022-23, the government has introduced certain tax guidelines on the sale and transfer of digital assets that would encompass cryptocurrencies and Non-Fungible Tokens (NFT).

The Finance Minister (FM) Nirmala Sitharaman in her latest budget speech announced that a flat 30% tax on profit from selling virtual digital assets will be imposed with no deduction on expenses except the cost of acquisition, the loss cannot be set off. The government have placed no room for loopholes, as even, gifting these virtual digital assets will be taxed in the hands of the recipient. In addition, Under Post Budget Press Conference the FM made clear that every crypto transaction will attract 1% TDS above the threshold. It is worth noting that the former tax provision of the union budget will come into force from April 01, 2022, while the latter will be enforced from July 01, 2022.

It can be considered as a welcome move as the tax on cryptocurrency brings it at par with the speculative income and it will be treated the same as lottery, game show etc. This is only going to increase the tax burden for cryptocurrency investors, who will have to shell out almost a third of their returns towards tax. On the positive side, these digital assets are given recognition and remove doubts on trading such assets.

Why Government took years to decide on cryptocurrency?

There are multiple reasons why the government took years to decide on the future of cryptocurrency in India. The major reasons are mentioned:

1. Lack of Data

Central Board of Direct Taxes chief J.B. Mohapatra stated that the government had been closely monitoring the crypto market for the last 4 years. As crypto is a developing market, the government needed considerable information about its operability to take any concrete decision. Therefore, the government has carried out a few pilot studies on this theme and strategically collected adequate data to design a future roadmap of the crypto market in India. Now, it has the required data set & it can go with future steps.

2. Covid Pandemic

First, India is a mixed-income economy (capitalism and socialism go hand in hand) where the emphasis is more on social welfare. During the covid phase, the government's priority was to save life and livelihood of the masses. As a result, the government restrained from taking any decision on the growing crypto market which could have further tensed the already volatile Indian market.

3. Digital Infrastructure

Digital infrastructure is the essential pillar to regulate virtual assets. A transparent, scalable, market surveillance, a stable technical infrastructure is critical to providing fair and orderly markets capable of managing high, sustained transaction loads and coping with peaks during volatile trading conditions. India lacked an effective digital infrastructure that could be meet the dynamic demands of the industry.

Comment on Government's Approach

The budget 2022 has cleared the confusion on crypto for the investor by providing the opportunity to make the right choice whether to put money or not in this risky asset. There is still ambiguity on a variety of issues such as the date of applicability, which head would cater with crypto, threshold etc. However, it is a progressive move for the rapidly emerging crypto and blockchain industry in India. Self-declaration and taxation are evidence of approval of the virtual digital market in India. It can pave way for further developing regulatory framework. New taxation policy will impact the sentiments of investors. Now, investors can take more systematic and balanced future financial decisions.