Until this year, India was one of the fastest growing markets for crypto assets. Then in April the government started taxing crypto transactions and volumes on local exchanges collapsed. The government presented the tax levy as an opportunity to formalize the asset class. It also made crypto trading prohibitively expensive. The decision comes amid a drumbeat of criticism of the industry from government officials and regulators. Some of the most withering attacks have come from India’s central bank as it prepares to launch a national digital currency that is a potential competitor to crypto tokens such as Bitcoin and Ether.
Why India blows hot and cold in dealing with crypto: QuickTake
1. What did the government do?
Since April 1, any gains from the transfer of crypto assets are taxed at 30%, a higher rate than in many other jurisdictions, including the US and the UK. Trading losses cannot be offset against income, even from another token. In July, the government added an additional 1% tax — to be deducted at source — on transfers of digital assets worth more than 10,000 rupees ($125) or on a total of 50,000 rupees of transactions over a single fiscal year.
The 1% transaction tax known as TDS, seen as unique in the crypto industry, hurt market makers and high-frequency traders who accounted for a large portion of trading volume. Trading on three exchanges – ZebPay, WazirX and CoinDCX – fell by between 60% and 87% after the tax took effect, data from CoinGecko shows. A typical high-frequency trader can see around 60% of his capital frozen for TDS payments after just 100 trades, according to Manhar Garegrat, former managing director of policy at crypto exchange CoinDCX.
3. What was the point of the move?
The collapse in crypto trading means the government is unlikely to reap much revenue from the new fees. What it does is give government officials a way to track activity on many crypto platforms. Since many of the digital tokens have an element of anonymity, officials are concerned that they could be used for terrorist financing, fraud and other illegal activities. There is also a risk that an unregulated environment could draw more domestic households’ savings towards volatile assets, leaving savers vulnerable to a crash.
4. Was the tax decision unexpected?
Not really. India has had a hot and cold relationship with digital currencies. The government is keen to promote crypto’s distributed ledger technology, known as blockchain. However, in 2018 the Reserve Bank of India barred banks from holding crypto or facilitating crypto transactions. The Supreme Court struck it down in 2020, but regulatory uncertainty has persisted and Indian banks remain hesitant to work with crypto startups. Government officials and financial regulators continue to warn about the crypto risks, with RBI Deputy Governor T. Rabi Sankar comparing cryptocurrencies to Ponzi schemes and suggesting they should be banned. Finance Minister TV Somanathan said India treats crypto trading as income from gambling and speculation.
5. Did the trade stop or just go elsewhere?
It is difficult to say as there is a lack of data. Local exchange WazirX said long-term crypto holders were still buying and selling, but others were migrating to foreign trading platforms or trading directly with each other over so-called decentralized exchanges to avoid the tax.
6. How big was crypto in India?
Investments in crypto in India grew from around $923 million in April 2020 to nearly $6.6 billion in May 2021, according to Chainalysis. The country’s population of 1.4 billion people skews young, with a growing, well-educated middle class. That, combined with a less developed traditional financial system, led to the world’s second-highest crypto adoption rate behind Vietnam, Chainalysis data showed. As of November last year, India had over 15 million registered crypto users with total assets worth $6 billion, said the chairman of Parliament’s finance committee. By comparison, 34 million US adults are expected to own a crypto asset by the end of 2022, according to estimates from Insider Intelligence.
While China has completely banned crypto transactions, India has yet to introduce a bill that defines digital assets and determines how they will be regulated. Finance Minister Nirmala Sitharaman has said that any legislation can only be effective with international cooperation to prevent so-called regulatory arbitrage, where companies act according to the most lenient jurisdiction to do business. The uncertainty sends a chill through the clusters of Indian startups developing products based on blockchains, from decentralized finance applications to non-fungible tokens. It is also unclear how India’s digital rupee, due to launch in 2023, will affect the industry. RBI Deputy Governor Sankar said in June that central banks’ digital currencies could “kill what little case there might be for private cryptocurrencies.”
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