Those crying hoarse over crypto tax should be thankful that the government didn’t ban crypto all together

• On February 1, Finance Minister Nirmala Sitharaman proposed a 30 percent tax on digital assets (cryptocurrency) gains.
• Some people are arguing that taxing crypto assets means the government recognizes the use of cryptocurrency but that is not the case.
• According to an estimate, Indians have invested more than Rs. 6,00,000 crores in the crypto market.

On February 1, Finance Minister Nirmala Sitharaman proposed a 30 percent tax on digital assets (cryptocurrency) gains. The startups and crypto trading community is confused about whether to celebrate this decision or not. First of all, the crypto community should be thankful to the finance minister that she did not altogether ban it, and some people are celebrating the decision.

Some people are arguing that taxing crypto assets means the government recognizes the use of cryptocurrency but that is not the case. The finance ministry bureaucrats made it very clear in the post-budget interviews that taxing the gains from crypto does not mean government recognizes them.

India has a good number of crypto startups and some of them like CoinDCX, CoinSwitch Kuber, WazirX have become unicorns. Moreover, the number of crypto investors in India is estimated to be around 6 crores, more than the population of many Western European nations. India’s cryptocurrency market is very big in terms of investment also. According to an estimate, Indians have invested more than Rs. 6,00,000 crores in the crypto market.

The use cases of crypto are still not very clear but the people invest because the prices are going up due to a rush from international investors. Crypto is certainly a technology with very high potential because the underlying concept of blockchain and decentralized finance can be used in a number of activities such as land records. But neither the government nor the investors are certain about which use cases are going to succeed, thus the government decided to take a measured approach and started to tax them.

“Everything that prevails outside of it, digital whatever, are assets being created by individuals. And if in those transactions, profits are being made, we are taxing profits made out of those assets, at 30 percent,” Finance Minister Nirmala Sitharaman said.

Experts in the crypto space feel the government is beginning to recognise cryptocurrency as an emerging asset class. Nischal Shetty, founder & CEO of WazirX, says, “This [taxation on crypto] will add the much-needed recognition to the crypto ecosystem of India. We also hope this development removes any ambiguity for banks, and they can provide financial services to the crypto industry.”

However, some experts err on the side of caution. “A nonchalant introduction of taxation on digital currency coupled with a withholding tax on every transaction could give rise to a lot of compliance issues for crypto businesses. There will be practical issues in complying with tax provisions on transactions where the identity of the buyer is unknown,” says Harry Parikh, associate partner – M&A tax and regulatory services, BDO India.

If the crypto industry does not tread cautiously and use the underlying technology for illegal activities such as tax evasion, drug trafficking, the government will be forced to ban it.

Directorate General of GST Intelligence (DGGI) conducted investigations on cryptocurrency service providers across the country. DGGI authorities found massive tax evasion while investigating these crypto exchanges.

Last month it was found that “Around half dozen offices of Cryptocurrency Service providers have been searched and massive Goods and Service Tax (GST) evasion has been detected by DGGI.” The agency, in a statement, reported that WazirX, a cryptocurrency service providing company was fined Rs 49.20 crore for evading legal taxes.

As per the sources, approximately Rs 70 crore worth of tax evasion has been discovered while investigating the crackdown on Cryptocurrency trade by Mumbai CGST and DGGI.

The crypto industry needs to ensure that some good use cases of these currencies and their underlying technology (blockchain) emerge to ensure they have the trust of the government. Also, retail investors should not put huge money in the crypto market as long as good use cases do not emerge and the government gives it official recognition.