With the Centre giving the much tomtommed cryptocurrency bill the miss in Winter Session of Parliament, pressure is building on the government to provide some clarity on how to regulate them in the budget.
Both industry and the revenue department want finance minister Nirmala Sitharaman to categorise cryptocurrencies (cryptos) as a digital asset to bring it under a structured taxation regime.
At present, gains made from cryptos are subject to capital gains tax, according to the Income Tax Act, in a manner similar to gold.
The number of crypto investors in India stands at a few crores with total investment of Rs 6 lakh crore according to an advertisement released recently by a group of 13members representing various segments of the industry including the Internet and Mobile Association of India and crypto exchanges under the Blockchain & Crypto Assets Council.
Nishant Shah, partner, Economic Laws Practice said “taxation of virtual currencies has been a subject matter of high level of recent controversies. It is expected that the budget shall clarify the government's stand vis-a-vis recognition and taxability of such virtual currencies”.
Ramesh Kailasam, president and chief executive of IndiaTech, a consortium of major cryptocurrency exchanges, said “the budget should ideally offer coherent rules on direct taxation and the GST Council should detail the applicability of taxation, else there will be confusion”.
The forum urged the finance minister to acknowledge cryptocurrencies as digital assets rather than currencies.
There is little certainty now about how cryptos would be taxed in India, owing to differences over whether they should be classified as currencies, securities or another form of asset. The income tax on returns from various investments range from 10 per cent to 35 per cent. GST rates could also be adjusted by how cryptocurrencies are classified.
There are three types of crypto trading: rupee transactions, crypto to crypto trading and foreign currency transactions. There has been a large gap on how GST is calculated on cryptocurrency by exchanges and tax agencies. Certain business strategies adopted by cryptocurrency selling platforms are drawing increased regulatory scrutiny, the forum said.
Investments in cryptocurrencies have witnessed a sharp growth in India. However, a specific regulatory framework dealing with cryptocurrencies is still under deliberation.
“In the absence of specific provisions governing taxability of cryptocurrency in Indian tax laws, there are several open issues triggering uncertainty such as whether such transactions need to be disclosed and offered to tax, method of computing the fair market value, costs, taxable income, and reporting requirements,” Rumki Majumdar, economist, Deloitte India said.
She said “a specialised regime for taxation of cryptocurrency be introduced covering, interalia, provisions dealing with classification of crypto currencies (capital asset vs. financial instrument vs. commodity), situations in which crypto currencies are taxable in India, head of income for taxation, expenses that can be claimed, income tax rate and reporting requirements.”
The government had planned to introduce Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the Winter session.
The 2021 cryptocurrency bill had a key difference from the earlier cryptocurrency draft bill introduced in 2019. It omits the words "banning of" in the title. Despite the name change, the main purpose of the bill still seems to be to prohibit the use of cryptocurrencies in the country.