After the Budget’s ‘crypto signal’, India awaits reforms

News: With the recent Budget announcement of a flat tax rate of 30% on Crypto assets, the Govt has set the ball rolling in the right direction. Although this is being seen as a move towards legalisation of Cryptocurrency, the Finance Min has made it clear in the Parliament that taxing Crypto assets is not equivalent to Govt legalising them.

As of now, further systemic changes are needed to carefully accelerate India’s progress in the underlying Blockchain technology and to ensure better handling of the demands of Crypto consumers.

What are the potential impacts & concerns of the Govt’s decision to tax Crypto?

Impact:

– The flat tax rate is de facto affirmation of the role that cryptocurrency and related technologies could play in India’s financial-cum-economic system in the future.

– It could also mean that down the road, the activities of Crypto startups might be legitimised and formally legalised. This would enable them to access the necessary support system, which might not have been available previously.

– High tax rate might hamper the willingness of investors to convert cryptocurrencies into the national fiat, but it may also open up more doors for technologically savvy and innovation-minded investors.

– The extremely high tax rate and the fact that the losses cannot be offset would motivate investors to look for alternative means of storing and undertaking transactions in cryptocurrencies. An inadvertent upside of this, then, is the prospective conversion and reallocation of crypto-funds from one form to another. For instance: Staking, lending and providing liquidity under DeFi (Decentralised Finance) activities.

This will help in the building up of India’s crypto-financial ecosystem in the long run.

Concerns

The community of small and medium-sized enterprises (SMEs) and lower-end high net-worth individuals is going to find it most difficult to access the DeFi ecosystem given the substantial barriers posed by the tax rates.

What are some other issues with India’s Crypto policy?

When it comes to India’s crypto policy at large, there is a fundamental lack of clarity in aspects other than taxation.

A Central Bank Digital Currency (CBDC) will definitely help in pushing for the adoption of digital currencies, but, equally, defeats the fundamental purpose of cryptocurrency, which is decentralisation.

What is the way forward?

Systemic reforms

– Reduction of tax rates in the future, by weighing in considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency.

– Introducing more rigorous regulations where appropriate

Incorporation of insights from seasoned partners from international communities

– Engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking.

Source: This post is based on the article “After the Budget’s ‘crypto signal’, India awaits reforms” published in The Hindu on 17^th Feb 2022.