What is the meaning of 30% tax on cryptocurrencies

After much uncertainty about the tax implications of transactions in cryptocurrencies in India, the central government finally announced a 30 per cent composite tax on income from Virtual Digital Assets (VDA) in the Union Budget for 2022-23.

Crypto research agency CREBACO has reported that in the first two days after the implementation of the 30% tax, the Indian exchange saw its volume drop by about 55% and domain traffic by more than 40%. This is in many ways an indication of how the Indian crypto space is reacting to the new tax guidelines.

On the other hand, the Indian government has recovered Rs 95.86 crore ($958 million) of unpaid GST from eleven crypto exchanges. The Central Board of Indirect Taxes and Customs (CBIC) has detected massive GST evasion by several crypto exchanges such as Coin DCX by Ucoin, Coin Switch Kuber, Uncoin and Flitpay (Coin DCX, Buy Ucoin, Coin Switch Kuber, Unocoin, Flitpay). Imposed. However, major thefts were unearthed at Zanmai Labs, where a crypto exchange named WazirX operated. The levy of GST and 30% tax on income from crypto transactions has only added to the ongoing debate on crypto tax in India.

The 30 percent tax rule has come into effect from April 1, 2022, but cryptocurrency transactions for the previous financial year (2021-22 period) will also be taxed. For this, a new section 115 BBH has been added in the Income Tax Act, 1961. Other taxes levied on VDA include one percent TDS on transfer, no basic exemption, no set-off on any loss, no indexation benefit irrespective of the holding period and tax on gift.

In India, gains from stocks and equity funds are taxed at 10-15 per cent and non-equity options, assets and gold at 20 per cent or a nominal rate. The imposition of tax on virtual assets at such a high rate has been considered an aggressive move by the industry stakeholders.

The new tax on VDA includes crypto assets such as bitcoin, dogecoin, etc., non-fungible tokens (NFTs) and any assets that may develop in the future. It is worth noting that mere imposition of tax on cryptocurrency assets does not make them legal in India. There is a widespread lack of clarity on important aspects like definition, taxation and computation.

Even some time back the Supreme Court of India had also asked the Center to clarify whether cryptocurrency trading or virtual digital currency is legal in India. The government has clarified that a law regulating VDAs will be introduced in India – but only when there is a global consensus on their regulation. The government is working on legislation regarding cryptocurrencies, but it may take time to be ready.

According to Crabeco, more than 105 million people, which is 7.90 percent of India’s total population, currently own cryptocurrencies, with a net worth of over US$10 billion. The higher tax rate will not affect large investors, who were already in the 30 percent tax bracket, but small investors and students, who were till now enjoying tax free returns on crypto investments, will now be affected.

Nitin Kamath, Founder and CEO, Zerodha, the country’s leading discount stock broker, believes that ‘30% tax without other tokens or the option to set-off the loss against deduction could lead to a drop in turnover.’

With effect from July 1, 2022, one percent tax deduction (TDS) will be applicable on transfer of VDA by a resident seller in case of profit or loss. However, this deduction is adjusted against the total liability and the refund can be claimed later at the time of filing the tax return. But stakeholders complain that the provision is impacting liquidity and traders who indulge in frequent buying and selling of such assets will be hit in a big way. For example, if a trader is trading 300 times in a year, his entire capital may be locked in TDS. This provision is being considered the most problematic for various reasons. Apart from such locking up of capital and raising unnecessary compliance requirements, it has not been clarified what comes under the purview of ‘transfer’.

It is worth mentioning that crypto is not only bought and sold, but also transacted through airdrops, forking, staking, P2P lending and wallet transfers. It can also be used to pay for goods and services. In such a situation, the government needs to clarify whether all these modes of transfer will come under the purview of those transfers on which TDS deduction will be applicable.

The Union Budget for 2022-23 states that the responsibility of deducting and depositing TDS will be on the buyer. However, due to logistical difficulties like non-availability of seller data like PAN etc. with the buyer, this responsibility may fall on the exchange.

No deduction will be allowed for any expenditure other than cost of acquisition while paying tax on VDA in India. Similarly, no exemption will be considered while charging tax on a person making profit from the transfer of such property, irrespective of his income or age.

Stakeholders have termed these tax provisions as discouraging investors. It is being said that instead of encouraging investors to make such investments for a longer period through measures like indexation, the government is repeatedly punishing traders through the rule of one percent TDS.

According to Jai Hao, CEO, OKX.com, “Taxing profits from cryptocurrency assets at 30% may not please all stakeholders equally. Higher taxes may discourage investors to opt for crypto as a mode of investment and may also delay mass adoption of crypto assets in India.

Industry observers fear that such a move will lead the industry to either go underground, or move out of India to countries such as Thailand, UAE and Japan, which have reduced their tax rates to become cryptocurrency hubs. Will go. Digitization and technology will further define every aspect of the economy, and if India does not provide a conducive environment to adopt such innovations through easy governance, it may lose out on key businesses and investments.