Budget 2023: Crypto Industry Seeks Tax Relief, And Allowance To Offset, Carry Forward Losses

The Indian cryptocurrency industry is expecting some key announcements, including reduction in crypto tax rates, from Finance Minister Nirmala Sitharaman when she presents Union Budget 2023-24 on February 1, 2023.

In her Budget speech last year, Sitharaman introduced crypto taxation for the first time by bringing private cryptocurrencies under virtual digital assets (VDAs). According to the crypto taxation policy under the newly introduced Section 115BBH of the Income Tax Act:

1. A 30% tax (plus applicable surcharge and 4% cess) will be levied on profits made from crypto trading from April 1, 2022 onwards
2. The losses made on any particular cryptocurrencies cannot be offset against profits made on other cryptocurrencies
3. 1% TDS (Tax Deductible at Source under section 194S of the Income Tax Act) is being levied on crypto transactions above INR 10K with effect from July 1, 2022.

On December 13, 2022, the Indian government revealed that an amount of INR 60.46 Cr had been collected in tax from entities for transactions in VDAs since TDS implementation in July. The taxation policy, however, sent a shock wave across the Indian crypto industry.

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 may lead to a loss of approximately $1.2 Tn (INR 99.3 Lakh Cr) of 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 a new tax regime in India, as per the report. Over 17 Lakh users switched to foreign exchanges to avoid taxation. 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.

“The idea of the government was very simple. They wanted to know how many crypto transactions are happening because they felt that a lot of people were not showing it in their returns. This is why they had this 1% TDS imposed on the seller. While most of the Indian exchanges implemented this since the rule came into implementation from July 1, foreign exchanges didn’t as they are out of Indian jurisdiction…we have to remember that crypto is truly global,” explained Rajgopal Menon, VP, WazirX.

This defied the very intention of taxation policy which, according to the government, was to track all the crypto transactions and collect 30% tax on profits without offsetting the losses.

Inc42 spoke to the industry stakeholders to find what exactly the industry is expecting from the upcoming Budget 2023.

Reduce TDS Rate To 0.01%-0.1% From 1% TDS 

Bharat Web3 Association, whose members include Polygon, CoinDCX, CoinSwitch Kuber, and Zebpay, has called for a reduction in TDS rate to 0.01% from the existing 1%.

Sumit Gupta, founder and CEO of CoinDCX, said, “Notably, through our representation for the upcoming Union Budget 2023–2024, we have suggested that the rate of TDS be brought down to 0.01%. This lower rate will help Indian VDA businesses offer competitive prices to Indian VDA users and protect them from exposure to unregulated foreign exchanges.”

Meanwhile, Vikram Subburaj, CEO of crypto platform Giottus, said that the sector holds the potential to be a key cog in the financial ecosystem and it is already creating thousands of jobs across the country. Crypto, as a fledgling sector that works on the cutting-edge technology of blockchain, would look for TDS and tax rationalisation, he said. “This (TDS) could be brought down to 0.1% on every trade without challenging its efficacy. This will bring more capital infusion to the sector,” Subburaj added.

Crypto Tax Rate Should Be On Par With Other Assets

According to Menon, the government needs to treat crypto like any other investment and bring in a tax structure similar to the one for stocks, securities, and mutual funds. The current tax structure does not make a distinction between long-term and short-term gains, he said.

Besides, while the government has brought cryptocurrencies and NFTs under VDAs, there is no clarity if crypto would be treated as a commodity or security or something else.

Industry stakeholders believe that levying a high tax on crypto income will not serve any purpose as investors have already started routing their transactions through global exchanges, and more would do so. Hence, there is a need for a “rational and sensible” tax structure, aligned with the one for equity shares and mutual funds,

End The Double Whammy: Allow To Offset Losses

The taxation on crypto profits and not allowing losses in one cryptocurrency to be offset against profit in other cryptocurrencies has had a negative impact on the industry. “If you’re trading and you’re investing, you are supposed to make losses. In many cases, people have to pay 30% taxes even if they end up making losses,” Menon said.

Echoing similar sentiment, Shivam Thakral, CEO of BuyUcoin, said that crypto investors should be allowed to offset and carry forward their losses to provide a level playing field to crypto assets. Such positive steps will encourage responsible mass adoption of digital assets and propel India into the next phase of the Web3 economy.

Govt Unlikely To Change Taxation Regime: Subhash Chandra Garg

While the industry is hopeful of changes in crypto taxation policy, Subhash Chandra Garg, former finance secretary, believes that any changes are unlikely.

Speaking to Inc42, Garg said that the government chose the harshest capital gains taxation regime for VDAs and also made it procedurally taxing by subjecting virtually all such transactions to a tough TDS and reporting system. The government and the Reserve Bank of India (RBI) have been quite uncomfortable with crypto assets, which was clearly reflected in the chosen taxation regime, he said.

“As this taxation regime, along with the meltdown and frauds in crypto assets trading industry in 2022, has substantially reduced fascination for owning and trading crypto-assets in the country, which is perhaps what government was looking for, I don’t think the government is likely to tinker with the current taxation regime in the coming Budget,” he added.

India Can Set An Example For Others

Garg believes that businesses built on distributed ledger philosophy through blockchain and which permit trade through crypto signatures are powerful alternatives to the currently prevalent centralised database digital technology systems. Web3 represents the core and vitality of the alternative blockchain cryptography technology-based digital system.

Therefore, it is vital that India evolves the policy ecosystem to seize the opportunities which this alternative system offers and then nurture it, Garg said. “It is unfortunate that in our efforts to tame the side effects of existing highly vacuous crypto assets trading, we are creating conditions which are killing the nascent Web3 industry. Flight of Web3 firm founders to more considerate and conducive jurisdiction symbolises that.”

Pratik Gauri, founder and CEO of blockchain startup 5ire believes that Web3 will lead to the world shifting to a “value creation” economy from a “value capture” economy. This will require a new set of rules, which democratises access to resources for creators and makes value creation as rewarding as capturing value. This means a direct relationship between the human capital and the consumers of its creation.

India has been pushing for global regulations for crypto for the last few years, and the country getting the presidency of G20 is an opportunity to lead from the front in this direction, WazirX’s Menon said.

While most of the countries are apprehensive about crypto, no country would like to lag behind in the tech race. It is time for India to set an example for other countries, he added.

Talking about Web3 founders leaving India and moving abroad, Manan Vora, SVP, Strategy And Operations at digital wallet infrastructure platform Liminal, said, “Moving to other geographies for business is one’s personal choice, but I feel that if policies and tax regimes in India are business-friendly, just like they are for the IT industry, there is no reason for Web3 founders to leave their homeland.”

All the crypto founders and executives Inc42 spoke to highlighted the need for clear regulations for crypto and Web3 to promote the industry.

“India has a very strong IT infrastructure which can provide a strong foundation for the Web3 industry to flourish. We urge the government to fast-track the crypto bill which has been pending for years. Although the tax part has been addressed, Web3, crypto assets, NFTs, and the Metaverse require a separate bill for other regulatory matters,” Tarusha Mittal, COO and cofounder of UniFarm and Dapps, said.