Why Union Budget 2023 Didn’t Address Crypto Issues

Following the release of the Economic Survey 2022-23 on January 31, 2023, it was mostly clear that Finance Minister Nirmala Sitharaman would refrain from saying anything on crypto in her Budget speech on February 1, 2023.

Surprisingly, the stakeholders of the crypto sector are happy that the minister did not speak about crypto in her speech.

“At a time when the economic survey has called crypto self-referential instruments that do not strictly pass the test of being a financial asset because they have no intrinsic cash flows attached to them, the Finance Minister has been very considerate in not bringing them up (no pun intended) in the Budget,” said Kumar Gaurav, founder & CEO of Cashaa.

“Our pain is not gone but no mention of crypto in the Budget has relieved us. This signals that the government is trying to understand crypto, and, until then, it will refrain from regulating it,” said a crypto founder, requesting anonymity.

In light of recent uncertainties surrounding crypto, including RBI’s stand to ban it, we frankly didn’t have any expectations from the government in this Budget, he added.

The comments from the industry experts have come at a time when they have been demanding the government to reduce 1% TDS on every transaction to 0.01%; allow setting off losses from a crypto against income from others, and treat crypto like any other investment.

Economic Survey Reveals Crypto Vulnerabilities

A day before the Budget, Economic Survey 2022-23 raised grave concerns pertaining to crypto. The survey said, “There are minimal global standards applicable to unbacked crypto assets, which do not currently mitigate all risks and vulnerabilities… There are regulatory gaps at each stage when crypto assets are issued, transferred, exchanged, or stored by non-banking entities. Crypto’s cross-sector and crossborder nature limits the effectiveness of uncoordinated national approaches.”

Further, the survey observed that the terminology used to describe the different activities, products, and stakeholders needed to be globally harmonised. The term ‘crypto asset’ refers to a broad spectrum of digital products that may need the attention of multiple domestic regulators based on their actual or intended use. There is a range of crypto actors, such as miners, validators, and protocol developers, which may not be easily covered by the country’s traditional financial regulations.

Commenting on the Economic Survey, the founder quoted above, who did not wish to be named, said, “The report is extremely selective. It has delved into the crypto regulatory landscape of countries like Albania and Nigeria but didn’t highlight the countries like South Korea and Australia, which would have been a better case study for India.”

Subhash Chandra Garg, former finance secretary, ministry of finance, had earlier told Inc42 that the new taxation regime, along with the meltdown and frauds in crypto assets trading industry in 2022, has substantially reduced the fascination of owning and trading crypto assets in the country, which is perhaps what the government was looking for. “I don’t think the government is likely to tinker with the current taxation regime in the Budget 2023,” Garg had said.

Since crypto is still new and ever-expanding in terms of technology and use cases, Vikram Subburaj of Giottus believes that the government is taking a calculated approach toward Web3 frameworks.

“One major positive aspect is that the government is taking a calculative approach. It is understandable that the government is taking time as the financial systems envisaged in Web3 would alter the way transactions are done and the ramifications would need technological and skill upgrades on the part of the government, banks, and all other stakeholders,” said Subburaj.

Crypto Policy Frameworks: India Waiting For Others To Make The First Move

The Indian government may introduce a crypto policy framework by 2024, sources close to the development told Inc42.

“The issue has been raised on multiple international forums and we are expecting some clarity by the end of this year, or latest by 2024. The Indian government will introduce the law/framework accordingly,” the sources said.

They also indicated that the Basel Committee on Banking Supervision (BSBS, BIS) has already finalised a prudential standard on banks’ crypto-asset exposures. Under the committee’s supervision, this prudential standard is set to be implemented by 1 January, 2025. The committee has been tasked with monitoring the implementation and effects of the standard.

In October 2022, the OECD delivered a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto assets.

“However, these frameworks and standards are limited in their scope of implementation. Since crypto moves beyond borders without any checks and balances, and many markets do not have basic KYC compliances in place. This is why India’s effort is to build a global framework first to identify the nature of transactions as well as beneficiaries,” sources told Inc42.

Further, RBI has its own valid concerns. The private stablecoins are backed by some form of collateral, which in the case of cryptos are sovereign currencies. RBI has already pointed out that, if allowed, stablecoins may directly compete with digital currencies. So, the idea is to popularise India’s CBDC e₹ first.

Crypto’s Taxation Woes In India

For the uninitiated, Sitharaman, in her Budget speech last year, introduced crypto taxation for the first time by bringing private cryptocurrencies under virtual digital assets (VDAs). Under the newly introduced Section 115BBH of the Income Tax Act the following recommendations were made:

• A 30% tax (plus applicable surcharge and 4% cess) to be levied on profits made from crypto trading from April 1, 2022, onwards
• Losses made on any particular cryptocurrencies cannot be offset against profits made on other cryptocurrencies
• 1% TDS (Tax Deductible at Source under section 194S of the Income Tax Act)  to be levied on crypto transactions above INR 10K with effect from July 1, 2022.

Since then, the country has seen a sharp decline in crypto transactions. Experts say the number of crypto transactions are now slowly shifting to the grey area.

According to a report by Esya Centre, a New Delhi-based technology policy think-tank, and Taxsutra, a B2B tax portal, the current tax architecture for VDAs (virtual digital assets) may lead to a loss of approximately $1.2 Tn (INR 99.3 Lakh Cr) to local exchange trade volume in the next four years relative to a pro-market scenario where, (a) TDS on VDAs is at par with that on securities (b) Tax policy allows the provision to setoff losses (c) Taxation of gains from VDAs is internationally competitive.

There was a shift of cumulative trade volume of around INR 32K Cr from domestic centralised VDA exchanges to foreign ones during February-October 2022, following the announcement of the new crypto tax regime in India, as per the report.

Over 17 Lakh users switched to foreign exchanges to avoid taxes. As a result, Indian exchanges lost up to 81% of their trading volumes in three-and-a-half months between July 1 and October 15, following the levy, according to the study.