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The provision of a 30 per cent tax on the transfer of cryptocurrency has facilitated the siphoning of India's wealth to foreign countries, experts told Business Standard. October 1 will mark six months of the rule's implementation, which finance minister Nirmala Sitharaman introduced in her Budget 2022 announcement.
"Since the imposition of taxes, India has seen a significant decline in trading volume and an exodus of crypto investors to international exchanges based on the belief that these exchanges do not cooperate with Indian authorities, thereby allowing individuals to save 30 per cent in taxes," Gaurav Mehta, founder of Blockchain auditing and taxation startup Catax said.
Apart from a 30 per cent tax, the government also introduced a 1 per cent tax deducted at source (TDS) on each trade where a crypto asset is exchanged for the rupee or another crypto asset. It came into effect on July 1.
"The 1 per cent TDS levied on top of the 30 per cent tax on gains from the transfer of crypto assets, is steeper than the taxation policy of most developed countries like the US and UK," Sumit Gupta, co-founder and CEO at crypto investment platform CoinDCX said.
"While we have been deducting the taxes as per government regulations, the users see this as a loophole in tax enforcement and are taking advantage of this grey area over whether the law applies to international platforms," Gupta added.
The TDS may be a bigger reason for investors to shift to other markets.
"More than the 30 per cent tax, it is the high TDS that has had an impact on crypto. The high TDS has pushed a lot of traders into the grey markets and potentially decentralised exchanges where it is difficult to trace transactions, let alone tax," a spokesperson of crypto trading platform CoinSwitch said.
Crypto investors try to escape the taxes by trading on international exchanges. However, it may not be true.
"It is essential to recognise that Blockchain is a public ledger and that it is possible to collect information about individuals' transfers, taxes, and related activity. It is just a matter of time before the government catches up with blockchain technology," Mehta said.
In a financial stability report released in June, Das wrote that cryptocurrencies are speculation under a sophisticated name.
"While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against," he wrote in the report's foreword.
In 2018, RBI banned the banking system from lending a hand in cryptocurrency trading. The order was, however, struck down by the Supreme Court in 2020.
Mehta said that taxation has resulted in no significant gains for the government.
"No significant benefits have accrued to the government other than a decline in trading volume, which is consistent with the RBI's goal of discouraging crypto investments in India via trading volume and making it a less speculative asset class," he added.
The industry is marred by the lack of clarity around laws and regulations. Experts are increasingly seeking reforms, including bringing TDS on crypto at par with other markets.
"If the TDS were to be at par with say the securities industry, it will help innovation in the crypto sector," CoinSwitch said.
"We urge the government to clarify and bring a level playing field in this matter," Gupta said.
"Hopefully, the government will address it soon with more use cases of crypto coming into the market," Edul Patel, CEO & co-founder of crypto investment platform Mudrex, said.
Patel added that more regulatory clarity would drive even more retail investors into the market.
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First Published: Fri, September 30 2022. 17:37 IST