Budget 2024: Crypto Startups Seek Tax Relief, Regulatory Clarity After Last Year’s Snub

After the Economic Survey 2022-23 called for global regulations for ‘volatile instruments’ cryptocurrencies due to their ‘geographically pervasive nature’, crypto didn’t even find a mention in finance minister Nirmala Sitharaman’s Budget speech last year.

However, the Finance Bill did introduce a significant amendment in the Income Tax Act under section 271C. This amendment entails penalties for non-payment of tax deducted at source (TDS) for transactions pertaining to cryptos and other virtual digital assets (VDAs). 

FM Sitharaman announced the government’s decision to bring cryptos under the tax net by levying a 30% tax on income from crypto and other VDAs in her Budget speech of 2022. Additionally, a 1% TDS was proposed on every VDA transaction exceeding INR 10,000. 

Since then, the crypto market in the country has witnessed a sharp decline in transactions, resulting in layoffs and closure of small crypto startups. Not to mention that the developments in the broader crypto world, including the collapse of FTX, also added to the troubles of the Indian crypto market.

As a result, the crypto industry stakeholders have been urging the government for a long time to reduce the 1% TDS to 0.01%, permit offsetting of crypto losses against income from other sources, and treat cryptos akin to traditional investments.

Now, with Sitharaman all set to present the Budget on Thursday (February 1), the biggest question is if crypto would find a mention in the finance minister’s speech for the interim Budget. However, the crypto industry is hopeful that the government would address some of its long-standing demands in the Budget.

TDS Removal & Other Tax Sops

Over the past two years, the crypto industry has been constantly appealing to the government to reduce the TDS from 1%. Industry stakeholders are hoping that the government would pay heed to this demand in this year’s Budget.

According to Manhar Garegrat, country head, India and global partnerships at Liminal Custody Solutions, the introduction of 1% TDS in 2022 has led to an estimated loss of $420 Mn in government revenue due to migration of Indian crypto traders to overseas platforms. 

“We propose offering tax breaks for the development of blockchain security infrastructure and the implementation of advanced security protocols. This incentive will attract investment, generate high-skilled jobs, and solidify India’s position as a global leader in secure digital asset custody,” Garegrat said.

He said the government should consider building special economic zones for web3 startups and provide tax holidays in their early years to promote these startups. 

Garegrat added that enabling users to offset losses from digital assets, as is the case for stocks, would also incentivise more startups to enter the crypto economy. 

“The crypto industry looks forward to the Union Budget helping the crypto sector’s growth and user adoption. One of the key limiting factors for the growth of the Indian crypto industry compared to other countries such as the US, EU, etc is the high TDS of 1%. We propose a reduction of the TDS to 0.01% which will help compete with the rest of the world and at the same time ensure that digital assets trading operations are done within the Indian jurisdiction,” Nischal Shetty, cofounder of Shardeum, said.

Echoing similar sentiment, Ashish Singhal, cofounder and group CEO of PeepalCo, urged the government to decrease TDS on VDA transactions to 0.01%, allow offsetting losses from VDA sales, and treat VDA income like other capital assets. It is pertinent to mention that PeepalCo houses crypto exchange CoinSwitch.  

“The Government of India has shown commendable leadership at the G20 to arrive at a roadmap for a global crypto framework, and has implemented domestic regulatory frameworks such as anti-money laundering that are in line with the global standards,” Singhal said.

“This could be the basis for India to reconsider its tax treatment of VDAs, which is an outlier, both domestically and internationally. Reducing the tax arbitrage that exists today will also help stem the flight of capital, consumers, investments, and talent, as well as dent the grey economy for VDAs,” he added.

Clarity On Crypto Regulations

While the finance ministry has imposed taxation on cryptos, the Reserve Bank of India (RBI) remains a steadfast opponent of the digital currencies. Citing financial risks associated with cryptos, the top officials of the central bank have multiple times called for a ban on them.

However, the government has so far not cleared its stance on the sector. As a result, there is a cloud of uncertainty hanging over cryptos, and startups want this to be addressed in this year’s Budget.

“In the upcoming Budget, we urge the government to replace uncertainty with clarity, not with a heavy hand but with a guiding light. A well-defined legal framework can unlock trust and fuel growth. This framework should address taxation complexities, establishing clear guidelines for income and transactions, not as barriers but as stepping stones,” Shivam Thakral, CEO of crypto exchange BuyUcoin, said.

Besides, Garegrat said that the current definition of VDA is very broad and the government needs to take a nuanced approach.

“The tokenisation of real-world assets (RWAs) is a $10 Tn opportunity and we are already witnessing rapid advancements in the field of tokenized RWAs. There is an urgent need for investment and innovation in these segments. If nurtured with progressive policies, India has the potential to become a global leader in the digital asset space,” he said.

Lately, global efforts towards crypto regulations have intensified. Many G20 nations and major financial hubs have either enacted or are in the process of developing national crypto legislation.

The International Monetary Fund (IMF) and Financial Stability Board (FSB) have cautioned against blanket bans, emphasising the potential for a regulatory framework. Such a framework is crucial for India as well, according to industry players. 

It must be mentioned that despite the regulatory challenges, India secured the top spot in Chainalysis’ 2023 Global Crypto Adoption Index. The country ranked first in four of the five sub-categories considered for the 2023 index. 

As such, the crypto players have a lot of expectations from the Budget. It remains to be seen if FM Sitharaman gives them something to cheer or the industry would have to be disappointed once again.