ETMarkets Conclave: Crucial aspects of taxation and crypto in India

Synopsis

Miloni Bhat, Editor of Digital broadcast at ET along with Anoush Bhasin, and Meyappan, uncovered and unwinded some crucial aspects of taxation and crypto in India.

ET SpotlightThe ETMarkets Conclave which serves as an enriching medium to deliberate on financial markets and the most advanced changes in the market was centred on cryptos this time. Miloni Bhat, Editor of Digital broadcast at ET along with Anoush Bhasin, and Meyappan, uncovered and unwinded some crucial aspects of taxation and crypto in India. Anoush Bhasin is the founder of New Delhi-based Crypto tax advisory board and Meyappan, is a lawyer who works on digital tax and social finance.

The 30% tax on cryptocurrencies has left many bewildered, for the lack of clarity on certain provisions but has been equally welcomed by the crypto community as an affirmative step. Provisions like 1% TDS, or whether to nullify the losses in crypto against the profits earned certainly needed much more clarity. Meyyappan feels that the taxation has targeted a set of companies, and hasn’t worked upon the taxation for individuals, not detailed on the valuation of gift tax, and how TDS would apply to various stakeholders.

Underlying reasons for the high crypto tax slab
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View Details »Anoush finds the high tax slab of 30% on cryptocurrencies valid for a few important reasons. The government has imposed the tax with the awareness of the tremendous profits that the retail investors have reaped from their investment owing to the high volatility in the prices of digital assets like bitcoin. The sector precisely attracted a lot of investors during and post-pandemic when people were eager to diversify their portfolios. Meyyapan, on the other hand, believes that the 30% tax slab has been levied due to the government’s perception of cryptocurrencies as casual gambling income and the entire thing as speculative trading, where digital assets do not have any intrinsic value whatsoever.

Crypto transactions that involve a multi-step process of converting crypto into INR to crypto to a stable coin also give an impression of large volume of transactions. Meyyappan quipped that even the simplest of crypto transactions takes one through the entire process and this is where clarification is needed between the intent of trading and market practices. This is why investors seek a tax advisor’s suggestion in paying the required tax based on their trading practices.

Repercussions of the 1% TDS imposed on crypto transactions
On being asked about the utility of 1% TDS being levied by the government on crypto from April this year, Anoush said it will help the government gauge the expanse and growth of the entire crypto ecosystem. However, he pointed out two major flaws in the implementation of this process that can turn the business unviable. Firstly it can make a commercial trader lose repeatedly 1%, and if he trades about 1000 times a day, he would lose 99% of his capital. Secondly, in crypto transactions the identity and personal details of the person are unknown. Lastly, with the fast crypto transactions, there is little time to deduct TDS deposits and do transactions. The solution for this lies in shifting the responsibility of TDS compliance to a centralised exchange by the government with clarity on content transfers. Anoush finds both the TDS rate and implementation process high and cumbersome for both small and high-frequency investors who feel deterred by it and would prefer crypto-friendly nations or not trade often.

Meyapppan threw light on bitcoin miners who are not covered in the 1% TDS provision so far. The taxation for them could be decided considering whether providing mining services to someone else or doing for themselves. If it’s service-based mining then it wouldn’t be eligible for VPN and if it’s being done for individuals then the cost of acquisition needs to be considered. The 1% TDS would also cause problems with peer to peer trades, as tracing information in even a centralised exchange would be difficult. Besides, the 1% TDS is quite high and may dissuade the traders. However, many representatives from the marketplace have reached out to the government to cut down on TDS which would be applicable from April 1, 2022, but would be implemented from July.

Sumit Ghosh, Co-founder & CEO, Chingari said, “It is an encouraging sign that governments around the world are considering taxing the cryptos rather than announcing a blanket ban on them. However, there needs to be some rationality behind taxing and it should not kill the liquidity present in the market. Further, as the sovereign governments start accepting the cryptos at a much larger scale, there will be competition among the nations to attract big crypto projects and that is exactly what we are witnessing in Dubai. Major crypto companies are rushing to Dubai as it offers a better regulatory framework in terms of taxation and other daily operations. Tax should be levied in such a way that it creates a win-win situation for the cryptos, users and the government.”

How to calculate crypto tax across exchanges and with the volatility?
Anoush explained that irrespective of the volatility, the tax liability would be computed after exiting a transaction. The benchmark value would not shift and it can be checked from Indian exchange or crypto price checking websites like CoinGecko. The challenges are, however, that it’s huge to know the historical price of each asset among numerous trades done on multiple exchanges. Besides, there are currently very few tax tools that would do the spadework of collecting data from all exchanges and estimate the profit and loss at the end of the year. Anoush hopes that the government must be working for easing tax assessment for various groups. Until then, one should maintain proper reports and seek professional help to compute taxes.

Stringent crypto taxation and compliance versus the stock market
Anoush opined that even though the crypto taxation and regulations are more stringent than the stock market with an aim to make people cautious of the risks, it will not take people away from the crypto market. It has unique advantages of being a quick source of reaping high profits, an inflation hedge, and a decentralised entity. Meyappan doesn’t think that taxation intends to discourage traders, but the ambiguity over the net gains after taxation in crypto trading needs to end and a clear set of guidelines need to be set by the government. The uncertainty on the legal front could prevent foreign corporations from doing business in India.

The investor protection and regulation of ASCI regulation on crypto ads
ASCI laid out guidelines to clearly indicate the risks in the investments of virtual digital assets in February 2022. Anoush believes that such a guideline should have come earlier when crypto was in its nascent stages. He thinks that investor protection and education of retail investors about the risks is of utmost importance and should have been prioritised as the first thing even before taxation and regulation because the crypto market is unpredictable and volatile. Meyyappan is of the same thought that ensuring dissemination of adequate information about market practices, exchanges and risks should be the responsibility of the government.

The classification of cryptos
Meyappan emphasises that crypto classification is not easy as it exists in various forms including derivatives and NFTs. The crypto regulation would evolve, gain clarity and be more comprehensive only with a continued conversation with various stakeholders. One can’t expect a very well laid and clearly demarcated crypto law for the very first time. The taxation of cryptocurrencies does not imply the legalisation of crypto, and it’s yet unregulated. But the government has warmed up to crypto by its tremendous growth in a short span and has shown its attention by regulating taxation at first.

For now, it’s good to conclude that the government has acknowledged the crypto sector for seeking good revenues, but this pool can be enlarged only with the rationalisation of taxes and TDS, and more specificity on the grey areas.

ETMarkets Conclave: Crucial aspects of taxation and crypto in India

Disclaimer : The above content is non-editorial, and TIL hereby disclaims any and all warranties, expressed or implied, relating to the same. TIL does not guarantee, vouch for or necessarily endorse any of the above content, nor is it responsible for them in any manner whatsoever. The article does not constitute investment advice. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
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Updated: 03/30/2022 — 13:00