The Regulatory Implications of India’s Crypto Transaction Tax

India’s crypto landscape lost momentum this year when the government introduced two laws requiring crippling taxes on unrealized crypto-related gains and transactions.

India’s first crypto law, which requires its citizens to pay a 30% tax on unrealized crypto gains, went into effect on April 1. A stir within the Indian crypto community ensued as investors and entrepreneurs tried to decipher the impact of the wave announcement or no success.

Knowing that India’s second crypto law – a 1% withholding tax deduction (TDS) on every transaction – would result in an even greater impact on trading activities, many Indian crypto entrepreneurs considered moving their foundations to more user-friendly jurisdictions.

Following the imposition of additional taxes, Indian crypto exchanges reported a massive drop in trading volumes. Data from CoinGecko confirmed that trading volumes on Indian crypto exchanges are down 56.8% on average as investors eye offshore exchanges to cut their losses on ruthless taxes.

However, Indian Finance Minister Nirmala Sitharaman has previously acknowledged the resulting backlash and revealed his intention to reconsider the crypto-related tax amendments after careful consideration.

On-the-ground impact of crypto regulations in India

Just days after the implementation of India’s infamous crypto laws, crypto exchanges in the region reported a massive drop in trading volumes. Nihal Armaan, a small crypto investor from India, told Cointelegraph that taxation is no deterrent when it comes to cryptocurrencies.

Instead, he likened the imposition of a flat 1% tax to a means of capital blocking, a feature used by companies to prevent investors from withdrawing their funds, adding that “TDS is not not the issue, the amount of TDS is – because that obviously reduces the number of transactions a person can make with their capital at hand.

The North Block of the Central Secretariat, the Residence of the Chairman of the Central Board of Direct Taxes, New Delhi. Source: Edmond Gall.

Kashif Raza, founder of crypto education startup Bitinning, told Cointelegraph that implementing TDS is a good first step in securing the crypto industry in India. While Raza added that investors like him who trade less might not feel the repercussions of such a law, he acknowledged that “the amount of TDS is a matter of debate because many traders active in the cryptography were impacted by this decision.”

Contrary to popular belief of trade downturns, Om Malviya, chairman of Tezos India, told Cointelegraph that he envisions little to no disruption for long-term investors. Instead, he expects pro-crypto reforms in current laws over the next three to five years. While waiting for more tax-friendly reforms, he advised investors to gain a deeper understanding of the technology, adding, “Even users in small towns will be forced to study cryptocurrency, study the team and the technology and the fundamentals behind it, and then to make any investment or trading decision.

Rajagopal Menon, VP of crypto exchange WazirX, told Cointelegraph that despite declining trading volumes, the exchange continues to focus on complying with new tax rules and adhering to standards set by regulators. locals, adding, “TDS won’t affect serious crypto investors, aka hodlers, because they have a long-term horizon in mind. In 2021, the exchange saw over 700% growth in signups from small towns such as Guwahati, Karnal and Bareilly.

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However, Anshul Dhir, COO and co-founder of EasyFi Network – a layer 2 decentralized finance (DeFi) lending protocol – told Cointelegraph that unless the Indian government introduces more friendly with prolonged tax exposure, passionate investors can join crypto entrepreneurs in the exodus away from India.

Taxes on cryptos and the creation of long-term holders

As crypto trading volume has seen a drastic reduction on Indian exchanges, this indicates investors’ willingness to hold on to their assets until pro-crypto regulations kick in.

In order to ensure profitable trades, Indian investors speaking to Cointelegraph revealed that they are waiting for a bull market to sell some of their holdings for profit. Agreeing with this change in the current mindset of investors, Malviya added that “if you want to pay this amount of high taxes, you have to be really sure that your investment will be worth more than what you are worth more than today. ‘today’.

Armaan reiterated that the TDS itself is not a deterrent to crypto traders, but “the 30% tax on profits with no ability to offset losses is severe and discourages any new trader even from trying to trade in the cryptocurrency industry”. Even though many Indians have welcomed the tax regime as it lends a sense of legitimacy to the crypto industry in the country, Dhir believes that “the tax rate is a deciding factor and will entice many potential investors to hold their investments in the virtual. digital assets.

On this front, Menon warned investors against trying to find loopholes in the law using foreign exchanges, peer-to-peer sites and decentralized exchanges. Regardless of the platforms used, all Indian citizens are liable for TDS; failure to do so will result in non-compliance with the country’s existing tax laws.

The slowdown in trading volumes has been accompanied by a drop in liquidity, which has also impacted the global liquidity of the overall crypto ecosystem.

India’s interaction with CBDCs

Central banks around the world seem to have unanimously agreed to experiment with or launch their own versions of central bank digital currencies (CBDCs). India, on this front, is expected to introduce a digital rupee by 2022-2023. According to the country’s finance minister, Nirmala Sitharaman, it should give a “big boost” to the digital economy.

While CBDCs fundamentally differ from how cryptocurrencies work, governments are in a race to create a fiat-based system that incorporates the best features offered by the crypto ecosystem. Raza added that an Indian rupee-backed CBDC “will contribute to faster and cheaper inbound remittances and global payments,” but doubts its acceptance as a store of value by retail.

As Malviya pointed out, CBDCs are well-suited to address use cases that require immediate issuance of funds, adding, “but that won’t essentially negate the case for cryptocurrencies.” Dhir, however, believes that CBDCs will complement the digital asset industry, especially DeFi projects. Moreover, India’s central bank, the Reserve Bank of India, must formulate policies conducive to innovation and growth and highlight the positive aspects of emerging technology to the general public.

For many, Indian crypto taxes appear to be a proactive measure to discourage trade. Still, speaking from an investor’s perspective, Armaan argued that the government had done its best to explain the tax structure with the information it had.

The waiting game

More favorable tax reforms are a waiting game for Indian entrepreneurs and inventors, but both communities must comply while preparing for greener pastures. For investors, this means learning about the ecosystem and trading best practices. Armaan’s approach in the current scenario is to have a low allocation and a systematic investment plan approach to investing.

Besides being mindful of market developments, Dhir advises the community to engage with the government on a personal basis with a positive mindset and not indulge in adversarial banter on social media. “New use cases, new projects and new products are only going to come out and this space is only going to get bigger. So whether you want to part ways or not, you have to do your own research and you have to commit added Malviya.

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Menon recommended that entrepreneurs continue to engage with the government in the hope that it will one day change its policies. “At the same time, all developments must also be shared with the government, so that they are aware of the innovation that is happening in this space by the talent at home; this can have an overall positive impact on the industry as a whole,” Raza added.

Additionally, Malviya said that entrepreneurs need to commit to the cause as they strive to create solutions for a growing number of use cases, adding that “you don’t necessarily have to focus on the exit from India; I think the first focus should be the problem you’re trying to solve. »

In the meantime, investors are hoping that constructive frameworks around cryptocurrencies will help remove bad actors from the equation.

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