As Finance Minister Nirmala Sitharaman put cryptoassets in the ambit of capital gain in her Budget speech and announced the highest tax rate of 30 per cent plus applicable surcharges for any income or for gifting of virtual digital assets in the hands of the recipient, many crypto-investors appeared to be relieved despite a hefty tax. For they thought that it would legalise crypto.
But, unfortunately, any assumption that the Budget announcement makes cryptoassets “legal” is grossly misconceived. Income is taxable irrespective of how the income was earned. In the Commissioner of Income Tax, Patiala vs Piara Singh (1980) case, for example, the Supreme Court clarified that illegality of business such as smuggling does not take the income out of taxation statutes.
Well, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 seeks to “prohibit all private cryptocurrencies in India” but allows for “certain exceptions to promote the underlying technology and its uses”. India thus remains ambiguous qua cryptocurrencies until the proposed cryptocurrency law is enacted.
In fact, cryptos were under the scanner for some time now, and India’s discomfort with crypto is not hidden either. In his Budget speech in 2018, the then finance minister Arun Jaitley said, “The government does not recognise cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these cryptoassets in financing illegitimate activities or as part of the payments system.”
Whatever is enacted in the law in the future, setting up a tax regime for crypto was possibly necessary — it would generate substantial revenue also. More than 10 crore Indians — nearly 8 per cent of the population — reportedly invested in crypto, with a total investment of more than ₹75,000 crore.
“There has been a phenomenal increase in transactions in virtual digital assets,” the Finance Minister also said during her Budget speech. Well, countries are having varied approaches to crypto, for sure. While El Salvador has embraced Bitcoin as a legal tender and China has imposed a brutal crackdown on crypto, most of the countries are trying to regulate it to the extent possible and also taxing crypto gains in their own styles and definitions.
Interestingly, the way the term “virtual digital asset” has been mentioned and handled in the Budget, would not only cover the standard cryptoassets such as Bitcoin or Ethereum, and the emerging market of Non-Fungible Tokens (NFTs), it kept the provision of handling any such derivatives of crypto and blockchain that might emerge in future.
There’s no denying that the true inheritance of the decade-long crypto-saga is blockchain technology, which is going to dominate our lifestyles in the coming years in many ways. This Budget may be a prelude to that. Digitisation of land records, as mentioned in the Budget, for example, would certainly use blockchain technology. Will blockchain technology also be used in the functioning of the proposed 75 digital banks?
Push for CBDC
The announcement of India’s proposed blockchain-based Central Bank Digital Currency (CBDC) in the Budget, however, is not new. The proposed Cryptocurrency Bill aims to “create a facilitative framework” for the creation of the official digital currency to be issued by the RBI. The Budget just proposed it more emphatically with a tentative deadline — FY2022-23. “Digital currency will also lead to a more efficient and cheaper currency management system,” the FM said.
While interoperability and increased usage of Digital Rupee maybe envisaged, there is no denying that the CBDC is nothing but a digital form of fiat currency. China has already introduced its own centrally-regulated digital currency called Digital Renminbi. Many other countries are considering launching CBDCs as well. So, essentially this was inevitable, today or tomorrow.
But, more importantly, can a central bank regulated currency like the proposed Digital Rupee be a substitute to the uncontrolled decentralised cryptoassets such as Bitcoin or dogecoin to the investors? Clearly, there is no parity between CBDCs and privately issued cryptoassets.
And a global concern with unregulated crypto is that the decentralised nature of cryptoassets makes it prone to money laundering, for claiming ransomware, and the supply of money for several terrorist activities. Speaking virtually at the 2022 World Economic Forum’s annual Davos conference in January, Prime Minister Narendra Modi likened crypto to supply-chain disruptions, inflation, and climate change. “To fight this, every nation, every global agency needs to have collective and synchronized action,” the Prime Minister said.
Earlier, in November, in a virtual keynote address at the Sydney Dialogue, an annual summit on emerging technology, the Prime Minister also said democratic countries should work together to ensure crypto “doesn’t end up in the wrong hands” and “spoil our youths.”
But, understandably, that’s never an easy task. For the time being, with India’s Crypto Budget a new era in the digital economy is ushered. Clearly, the high tax rate imposed on crypto incomes may well be intended to discourage investors. That might work to some extent, of course. But, most investors are usually happy to comply with the rules. And, the difficulties in restricting the “wrong hands” in handling crypto would remain. The widespread concerns regarding the unleashed crypto genie thus continue.
The writer is Professor of Statistics, Indian Statistical Institute, Kolkata