A profitable proposition?

One of the highlights of the Budget, the taxing of income on virtual digital assets at 30 per cent, has come to be widely talked about on social media and in public circles. It is indicative of the popularity the crypto industry has gained over the past few years in India. This popularity, in turn, stems from the high degree of profitability associated with the trading of cryptocurrencies. Perhaps this could be a reason behind the government's move to put the income from cryptocurrencies in what could be called the highest tax slab across the country. It is also well-known that the Central government has been finding itself in an uneasy relationship with the crypto industry and the discourse has shifted from complete ban to regulation. Industry experts have come out with divergent views on the government's decision to tax the income from digital assets. Some see it as an attempt to disincentivize crypto trading, others hold the contrarian view that taxing crypto in a way gives recognition to the market. Interestingly, the government has refrained from using the term cryptocurrency and rather made a naïve reference to digital assets. The fact remains that India is eager to reduce the dependence of the economy on cash. It has been consistently pushing towards a cashless economy. It is also in the league of countries that have shown readiness to leap towards adoption of Central Bank Digital Currencies. The apprehension of the government is not at all around the nature of digital transactions but the unprecedented scale that the crypto market has acquired. Finance Minister Nirmala Sitharaman pointed out in her Budget speech that the "magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime". It won't be completely wrong to deduct that the government's decision to tax the income from digital assets has emerged from a revenue perspective as well. There is no doubt that the fiscal space of the government has been shrinking all throughout the pandemic, making marginal gains occasionally. Revenue sources have also dried up to a certain extent and the need for public investment is of unprecedented scale — across almost all sectors. In such a scenario, taxing of the crypto Industry appears to be a lucrative option for revenue. As per the industry estimates, there are around 15 million to 20 million crypto investors in India and the total crypto holdings stands at around Rs 400 billion. But certainly, the fact cannot be discounted that the intent is also towards disincentivizing crypto trading. Apart from the exorbitant tax of 30 per cent, there are other key budgetary decisions around cryptocurrency that may dissuade investors from investing in the market. The finance minister announced that the losses from transfer of digital assets can't be set off against any other income. Also, all crypto transactions will be taxed 1 per cent at source, along with taxing of recipients of gifted digital assets. It must also be noted that the 30 per cent tax is made more burdensome with additional cess and surcharges. A fair degree of apprehension appears to be looming across the right-wing circles around the potential misuse of the cryptocurrency by terror outfits. As an alternative, the government will come up with its own digital rupee to bring in cheaper and more efficient currency management. Apparently, the aim is to grab the major share of the booming market of digital currencies. But how far will digital rupee be able to compete with crypto is a question to ponder upon. In the first place, though the digital rupee will be based on blockchain technology, it is not known to function through a distributive ledger which ensures the anonymity of the investors in case of cryptocurrency. This also raises critical questions around privacy issues. In a nutshell, the digital rupee will have to cover a great distance to attain a dominant position in the industry. Everything said and done, the government also naively appears to accept the crypto trading in a way. There is perhaps a need for greater clarity in the government's approach towards cryptocurrency. A certain framework, where both the parallel systems could coexist harmonically, needs to be brought in place to ensure that the business remains profitable for all the involved stakeholders.