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How Modi govt has given legal sanction to cryptocurrencies in India, through the backdoor

In Budget 2022, FM Sitharaman labels cryptocurrencies as ‘digital assets’ and not currency, and taxes income gains from their transactions at a high 30%.

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New Delhi: Finance Minister Nirmala Sitharaman virtually gave legal sanction to cryptocurrencies in the country – by labelling them as “digital assets” and not currency and taxing income gains from their transactions at a high 30 per cent.

Her announcement in the Budget presentation largely ends the uncertainty over the future of cryptocurrencies in India. It comes a day after Principal Economic Advisor Sanjeev Sanyal said the government would take a balanced view on crypto.

India’s booming crypto market was roiled at the end of last year when the Modi government proposed to introduce a bill in the Winter Session of Parliament which, among others, sought to prohibit all private cryptocurrencies in the country. 

That bill was, however, not introduced with government sources suggesting that whenever a bill is brought, it would be referred to the parliamentary standing committee for wider deliberations with stakeholders.

On Tuesday, Sitharaman said that income generated from transfer of any virtual digital asset will be taxed. Moreover, the government will levy a tax deducted at source (TDS) on payments linked to such transactions. 

“There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent,” the FM said in her fourth Union Budget speech.

She also announced that the Reserve Bank of India (RBI) will introduce its digital currency in 2022-23.


Also read: No populism, no tax cuts, only capex & focus on infrastructure, growth in Modi govt’s Budget


Tax rates and tracking of transactions

According to FM Sitharaman, the government won’t allow loss from transfer of digital assets to be set off against any other income.

While the FM announced that TDS will be applicable on payments related to transfer of assets at the rate of 1 per cent, she didn’t specify the threshold over which TDS will be applicable. But she clarified that even a gift of virtual digital assets will be taxed at the end of the recipient.

“We are not taxing currency that is yet to be issued. And that provision is now made and the currency in the name of digital rupee will be issued… everything that prevails outside of it will be assets being created by individuals. And in transacting that asset if the profits are being made we are taxing that profit at 30 per cent,” she said at the post-Budget press conference.

“We are also tracking every track of money in that by saying that there will be a 1 per cent TDS,” she added.

Ban on cryptocurrency had been favoured — until today

So far, the central bank pushed for a complete ban on investments in cryptocurrencies as it fears that these can harm the macroeconomic stability in the economy.

“A bill on cryptocurrency and regulation of official digital currency is under finalisation for consideration of the cabinet,” Pankaj Chaudhary, Minister of State for Finance, had told the Lok Sabha in December.

At the ‘Summit for Democracy’ organised by the US last year, Prime Minister Narendra Modi, too, had said that world leaders must jointly shape global norms for emerging technologies like social media and cryptocurrencies, so that they are used to empower democracy, not undermine it.

Currently, there is a regulatory vacuum on the legality of cryptocurrencies. In March 2020, the Supreme Court had struck down a RBI circular barring regulated entities from providing services to those dealing in cryptocurrency related businesses.

The government has on occasions also clarified that cryptocurrencies will not be treated as legal tender in the country.

On Tuesday, Vipin Kumar, Chief Executive of Technoloader Pvt. Ltd, a leading blockchain technology development company, lauded the Budget move.

“It’s a big bang to a revolutionary journey in India. People seem to welcome this ‘devastating move’… (but a) 30 per cent tax slab cleared rumours about crypto ban. It gives a legitimacy boom in the bigger crypto sphere,” Kumar said.

“The government is lighting up the path to a progressive stance. It leads to leverage job opportunities in the IT and blockchain industry. Such a glance of the government will take India to a top notch position in the blockchain industry,” he added.

(Edited by Amit Upadhyaya)


Also read: Modi govt continues infra push, Budget shows big jumps for highways, transport & tap water


 

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