On the Indian budget & taxes on crypto transactions.
Why the move?
1. Pre Budget, many had demanded clarity about the taxation over income earned from the crypto-assets & GST rules implemented on trading platforms to make life easier for parties involved.
2. Industry players were not bothered with high tax rates but were keen to get crypto to be classified as a legal asset. Recognition in the Budget is perhaps one step in that direction.
Are Cryptos now legal?
1. There is no regulation governing cryptocurrencies in India. In 2018, India banned crypto transactions, but the Supreme Court struck down the restriction in March 2020.
2. Taxing income from cryptocurrencies does not necessarily legalize cryptocurrencies. Because income tax is not concerned about the manner or means of acquiring the income. An income earned from both – legal or illegal activities – can be taxed under Income Tax Act.
What’s next for crypto regulation?
1. It is highly unlikely that the government will collect tax from cryptocurrency transactions and THEN introduce a bill to make cryptocurrencies illegal.
2. Hence cryptos may eventually be recognized as an asset class (and regulated & taxed accordingly) but never recognized as a currency.
Why is India adopting Central Bank Digital Currency (CBDC)?
1. Many central banks have been exploring this option and with China has forged ahead, India doesn’t want to be left behind.
2. To counter the volatility & independence of cryptocurrencies as CBDCs are issued and regulated by the central bank.
3. High currency-to-GDP ratio. The cost of printing, transporting, storing, and distributing currency can be reduced as substantial amounts of cash can be replaced by CBDCs.
4. To make payment systems more real-time and cost-effective. An Indian importer can pay its US exporter on a real-time basis in digital Dollars, without the need of an intermediary.
5. Time zone difference would no longer matter in currency settlements.
The devil is always in the details. Let’s see the CBDC & Cryptocurrency regulations once they come out, probably later this year