Global consensus on crypto regulation positive, but taxation remains sticking point

While the consensus reached in the G20 Leaders’ summit on setting a common framework to regulate cryptocurrency has brought a sigh of relief to the beleaguered industry, in India, the 1 per cent tax deduction at source (TDS) on every transaction remains a pain point. The industry is now lobbying to have this reduced to 0.1 per cent, citing various reasons for it.

The synthesis paper jointly released by the Financial Security Board (FSB) and the International Monetary Fund (IMF), earlier this month, is a recognition that a blanket ban on the asset class would be counterproductive. Saved from the perilous wrath of governments across the globe, the industry is cheering the Crypto-Asset Reporting Framework (CARF) proposed by the synthesis paper.

It will encourage rapid exchange of tax information, which provides authorities greater visibility into crypto transactions and facilitates tax compliance,  said Richard Teng, Head of Regional Markets at Binance. “In the near future, we can anticipate a licensing regime that articulates clear conditions around crypto operations, consumer protection, anti-money laundering, and other diligence requirements. Progressive regulatory norms are key to building a digital asset landscape that supports the industry’s growth and innovation,” he added.

However, taxation guidelines are a sticking point that industry players still require clarity, point out others. CARF still doesn't solve the high taxation bracket that crypto transactions fall under in India, they contend. Currently, digital asset transactions are taxed at the highest income tax bracket of 30 per cent, along with a 1 per cent TDS that is levied on every transaction. While the aim of the TDS was to track crypto transactions, it has become excruciating for exchanges that have seen volumes fall manifold since its introduction.

Although, investments from the country have not seen a similar dip, indicating that Indians are instead using foreign exchanges based out of tax havens to facilitate trades in order to avoid the 1 per cent TDS, CoinDCX’s Chief Public Policy Officer Kiran Mysore Vivekananda said. He encouraged the government to recognise the flow of funds to offshore exchanges, and create a level playing field, with standard taxation, preferable at 0.1 per cent instead, to encourage that Indian investors use domestic exchanges instead.

“The taxation on VDAs was imposed in a regulatory vacuum. It is likely that once the position on cryptocurrencies has been clarified, the government will choose to relook at the taxation on VDAs to give a boost to the industry,” projected  Anupam Shukla, Partner, Pioneer Legal, a Mumbai-headquartered law firm.

Hanging on to the hope, Vivekananda noted, “Three things have emerged from the synthesis paper. One is that local regulations, or those with the view to curtail the industry, may not happen with emerging technologies. That has come out very clearly. Secondly, it has been clarified that we need global cooperation and seamless access to information globally to make sure the regulations help.”

He went on to underscore, “Finally, it has been agreed that banning this activity is not a correct approach because of the borderless nature of the industry, it would be impossible for any country to ban it. This is a win-win situation for the industry as we were always going through an existential crisis.”

Sharing his cheer, CoinSwitch co-founder and chief executive Ashish Singhal, added, “The government has not only undertaken measures to expand the dialogue but has also made concerted efforts to improve the understanding of  virtual digital assets (VDAs). This unequivocally signifies that we have progressed beyond discussions centred on banning VDAs.”

But most in India recognise that only half the battle has been won, as a regulatory framework specific to the country is unlikely to be introduced anytime soon. Moreover, the asset class itself proves difficult to be regulated, owing to its borderless and constantly evolving nature. The government might consider a “Goldilocks zone of regulations for cryptos,” where the regulatory environment is neither too strict nor too lenient, Shukla pointed out.

“India will have to strike the right balance while formulating its regulatory framework. Extremely restrictive regulations will end up curbing innovations and affecting the growth of the industry. However if the regulations are not robust enough, uncontrolled growth of the industry could lead to instances of illegal transactions, money laundering and tax evasion, funding of terrorism,” he elaborated.