Cryptocurrencies and non-fungible tokens (NFTs) have recently been a widely discussed topic in India. More than 10 million investors have poured into what was once a nation of uncertainty into one of the most active cryptocurrency marketplaces. The fact that the industry flourished during a time when cryptocurrencies had no legal status in the nation is fascinating. It has been a long time coming, but regulators have now given the nascent sector of cryptocurrency the attention it deserves, but with a hefty tax and an upcoming digital rupee.

Indian finance minister Nirmala Sitharaman highlighted crypto taxes in her Budget address on February 1, but not all is as it seems. To implement these measures, she also recommended a slew of changes in the 1961 Income Tax Act. Inserting numerous sections and clauses like Section 115BBH, 194S, and Clause 47A is among them.

Section 115BBH

With the inclusion of Section 115BBH suggested by Sitharaman in the Finance Bill, 2022, profits gained from the transfer of any virtual digital asset are expected to be taxed at a rate of 30%. Taxes on the remaining income will be applied in accordance with the current tax slabs.

This will help you understand it better. If you put INR 1,000 into a crypto asset, like bitcoin, and then sell it for INR 1,200 after some time, your income from the transaction would be subject to a tax of 60 rupees, as per the latest tax proposal. NFTs will be taxed under the same rules as other types of crypto investments.

As an example, let’s look at Rahul, a cryptocurrency user who makes INR 10 Lakhs a year as annual profits. Rahul’s profit from his crypto-investment activities was INR 1 Lakh out of INR 10 Lakhs. If this is the situation, Rahul’s income will be split into two portions and taxed proportionally.

According to the tax regime, INR 9 Lakhs from other sources would be taxed at 10%/20%/30% as per the prevailing tax rates.

Income from cryptocurrency/NFT investments will be taxed at a flat rate of 30%.

In other words, Rahul will have to pay INR 30,000 in tax on crypto revenue alone and the other INR 9 lakhs in income; the tax will be calculated depending on whether he opts for the new or old tax system.

1% Tax deducted at source. What does this mean?

Section 194S of the Income Tax Act has been suggested as an amendment to provide for a tax deduction of 1% on payments made for crypto transactions. This is being done in order to maintain track of the country’s crypto-related transactions.

For crypto transactions, the finance ministry has recommended a TDS threshold. In accordance with Clause 194S, no tax will be deducted if the payer is a ‘specified person’ and the value/aggregate value of such consideration provided to a resident is less than INR 50,000 in a financial year. In all other instances, a yearly cap of INR 10,000 is recommended.

Here “specified person” is an individual or a HUF (Hindu Undivided Family) whose total sales, gross revenues, and turnover from the business he operates is not more than INR 1 Cr (or INR 50 Lakh in the event of a profession), during the financial year immediately before the financial year when a digital asset is transferred.

What about Staking or mining?

Another intriguing part of the bill was the fact that, for some reason, the federal budget doesn’t address cryptocurrency mining, staking, or the taxation of crypto miners. Mining has been a heated topic of discussion, especially in the realms of environment and taxation. Our leaders seem to be uninterested in these sectors either because the mining community in India isn’t that large to be of concern, or they just want to put everything under one big tax bracket. Experts say the current 30% tax solely applies to cryptocurrency buying and selling and does not include mining.

As of now, this means that miners do not have to pay any crypto tax until they sell or convert their crypto assets into INR or another virtual digital asset.

Crypto exchanges have been charging a 1-2 % fee for the facilitation of crypto-to-crypto, crypto-to-INR, and crypto-to-foreign currency transactions up until now. A GST of 18% is levied on the commissions that these companies receive as a result of their services. But at times, income tax officials have asked them to pay 18% GST on transactions instead of commissions. The Union Budget didn’t give any more clarification on this front either.

Moreover, not all crypto businesses run crypto exchanges. Many of them are brokerage firms that provide a variety of services, including the buying, selling, and holding of cryptocurrencies. In addition, some exchanges charge in crypto for offering crypto-to-crypto transactions. If these cryptos are converted into fiat currency, the 30 percent tax will be enforced at some point in the future. However, if these platforms are required to pay a 30% tax on the income they make from crypto transactions, it will be an impractical alternative.

Crypto community backlash

Initial reactions about the government’s recent move were positive from those involved in the crypto community. However, when Aditya Singh, the creator of Crypto India, initiated a petition asking for a decrease in TDS to 0.05 percent and a lower tax bracket in accordance with the tax levied on the gains from bonds and shares, the situation quickly devolved into chaos. So far, more than 60K people have signed the petition.

The digital Rupee

It’s the first time that India has officially jumped on the CBDC bandwagon. The Reserve Bank of India (RBI) had indicated last year that it planned to introduce a digital currency. At the time, the government was considering a ban on the usage of cryptocurrencies. However, things came to a halt when a committee was formed to evaluate the country’s future relationship with cryptocurrencies.

Now, an Indian digital currency will be established by the Reserve Bank of India (RBI) by April 2022 to enhance the digital economy and increase currency management efficiency. Digital currency, as the minister pointed out, would be useful for currency management as well.

But is the digital rupee just the software version of the physical rupee? Not quite. As a CBDC, which is almost like any other cryptocurrency (minus the decentralization part), the digital rupee is expected to offer a slew of benefits as it exploits the immense potential of blockchain technology.  

For example, the digital rupee could be used to provide social benefits and other targeted payments in a country. In certain cases, the central bank can issue a pre-programmed CBDC that can only be used for a specific purpose. For LPG subsidies, for example, pre-programmed CBDCs may be issued as DBTs. In order to accept this CBDC, only authorized LPG distributors may do so; it would be denied if it was not. This CBDC can be converted to fiat money or a general-purpose CBDC by any commercial bank with the necessary authorization for LPG agencies.

In addition to this, there are countless more possibilities that this emerging technology presents. Decentralized alternatives like Bitcoin and Ethereum are anticipated to be subjected to new regulations as India introduces its own digital currency. With an open mind, this might be an opportunity for India to emerge as a leader in emerging technologies.

Looking ahead

When it comes to effectively regulating cryptocurrencies, we still have a long way to go, but recent moves have helped to rekindle investor confidence in the market and allay worries of an absolute ban on the industry, as had been speculated earlier. As a nation, we already have one of the fastest-growing startup sectors in the world, and cryptocurrencies and blockchain technology will be an excellent match for furthering our nation’s ambitious ambitions, especially now that the government is finally paying attention to the industry as it deserves.