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Whether you are a current cryptocurrency hodler or a potential investor in India, the government wants you to think twice before investing your money in the sector.
For crypto enthusiasts in the country, it has been difficult to get excited about the space due to speculation about bans and restrictions in recent years.
In February, the county finance minister, Nirmala Sitharaman, gave hope to the the introduction of a tax regime and industry recognition. While it did not grant any legitimacy to the cryptocurrency sector, the move did mean that there will not be a blanket ban on trading any time soon.
But in recent weeks, as the tax proposal became law and more clarifications about its inner workings have come to light, the industry has had a backlash.
Many political and business leaders said that the new crypto tax law will deter investors from pouring money into the sector. In this story, we will see how it works and what impact it could have on the future of cryptocurrencies in India.
How does India’s cryptocurrency tax work?
There are two layers to India’s new cryptocurrency tax. First is the capital gains layer, where you have to pay a 30% tax on the money you have earned from trading digital assets.
This is pretty standard, and many countries like the US and UK have a similar form of tax structure for cryptocurrencies.
However, the problem is that you cannot offset your losses, even within cryptocurrencies. So, if you have lost Rs 1,000 ($13.13) trading Bitcoin and earned Rs 1,000 ($13.13) trading Ethereum, you will have to pay 30% tax on the money earned.
This law is in force from April 1.
There is another layer called Tax Deducted at Source (TDS), and this applies to all digital asset transactions.
Suppose you are buying some ETH from a cryptocurrency exchange and then transferring it to your MetaMask walletand then buy an NFT from a marketplace like Opensea.
You will have to pay 1% TDS at each of these stages if a single transaction exceeds Rs 10,000 ($131). The 1% TDS applies to all transactions. In addition, the tax applies to any transaction if your cumulative trading exceeds Rs 50,000 ($656) per year.
The industry reaction
While the initial industry reaction to the new tax rules was positive, the clarification of TDS-related laws frustrated many.
Last month, Ritesh Pandey, a member of parliament, said that rigid TDS rules will “lead to red tapism” and negatively impact the crypto asset class.
Sathvik Vishwanath of cryptocurrency exchange Unocoin said that these rules go against fair market trading practice.
A TDS like 1% for each trade could make any speculative instrument quickly illiquid! This will go against fair market prices for those instruments and may push underground trading. So taxing more is bad! #reducecryptotax #faircryptotax Day-31 #IndiaWantsCrypto @unocoin
— Sathvik Vishwanath (Unocoin) (@sathvikv) March 4, 2022
Other industry leaders they also registered their concern about how this rule would slow down the growth of the sector.
But taxes are not the only obstacle for potential cryptocurrency investors from India.
Payment regulators create problems
Last week, Coinbase, one of the world’s largest cryptocurrency trading platforms, launched its service in India. At the time, it supported the country’s Unified Payment Interface (UPI) system, making it easy to make payments through your phone.
Days later, the National Payments Corporation of India, a regulatory body that oversees UPI, issued a statement saying that it is not aware of any cryptocurrency exchanges using it:
NPCI Statement of April 7, 2022. With reference to some recent media reports on buying Cryptocurrency using UPI, the National Payments Corporation of India would like to clarify that we are not aware of any Cryptocurrency exchange using UPI. Please see the attached document pic.twitter.com/lGTcaSLKeC
— NPCI (@NPCI_NPCI) April 7, 2022
After the statement was issued, Coinbase stopped receiving payments through UPI, while Indian exchange Coinswitch Kuber halted UPI payouts and apparently other forms of deposits. Another incumbent, WazirX, had stopped accepting UPI-based payments since December.
That means you have to rely on p2p trading, where you can buy stablecoins like USDT from other investors and exchange them for other tokens, or use the Instant Payment Service (IMPS).
The second method requires you to go through several steps, such as adding an account number to your bank’s payee list, and before you deposit the money. It’s more cumbersome to use than UPI and requires more steps, and it can turn off some people trying to deposit money quickly.
Mobikwik, a wallet that supported payments on some Indian cryptocurrency exchanges, also pulled your support since April 1which made it more difficult for investors to put money.
For years, the central bank of India did not like the idea of cryptocurrency trading. It issued an infamous directive that prevented banks from participating in cryptocurrency exchange trading in 2018, but the high court reversed the decision in 2020.
Even after the new tax structure was proposed in parliament, the Reserve Bank of India (RBI) was in favor of banning cryptocurrencies.
Decline in trading volumes
Since April 1, when the new tax law for cryptocurrencies came into effect, trading volumes on major Indian exchanges have plummeted.
According to data from Crebaco, the number of transactions on Indian exchanges WazirX, CoinDCX, and Bitbns fell by 72%, 52%, and 41%, respectively, in the first 10 days of the month. Although these are data from a short period of time, the drop is very pronounced.
Nischal Shetty, CEO and co-founder of WazirX, said that despite the new tax laws, there is no banking support for cryptocurrency exchanges:
Banking is one of the biggest hurdles for cryptocurrency trading right now. Exchanges do not have access to any banking services, and that is a major factor in declining trading volume.
Sidharth Sogani, CEO of Crebaco, said that strict tax guidelines and a negative image around cryptocurrencies have contributed to a decline in investments.
A hard road ahead
For crypto investors in India, the road ahead is difficult as there is a lot of uncertainty around tax rules.
They will need to track their investments and file reports with the income tax authorities at the end of the tax year. Given the dispersed nature of De-Fi, it will be difficult to record all transactions and apply the 1% TDS.
While entities in India can deduct 1% for all digital asset transactions, it is unclear whether global companies will follow this rule.
Shetty said the complexity of tracking transactions and the lack of compensation for losses could lead to many people not paying taxes at the end of the tax year. And that’s not a good sign for any investment vehicle.
The cryptocurrency industry in India is still engaging with the authorities to ease some of the regulations. One of the proposals they have raised is to reduce the TDS from 1% to 0.01%.
Sogani noted that these rules could have a negative impact on exchanges and DeFi companies that want to invest in India. He added that clear guidelines and regulations on cryptocurrencies will prevent people from being hesitant to invest in them.
Currently, there is no specific law on the regulation of cryptocurrencies apart from tax regulations. Reports suggest that India will study global rules around the industry form its own regulatory framework. We can’t expect it to arrive in a matter of months.
For now, there remains a layer of uncertainty and hesitation surrounding cryptocurrency investments in India.
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