Will the Union Government Reduce Taxes on Crypto? The current tax architecture may result in a loss of approximately INR 99.3 trillion of local exchange trade volume over the next four years according to a study by The Esya Centre

Taxes have become a major stumbling block for the growth of the crypto sector in India. Heavy taxes are being levied on crypto transactions. The crypto sector has been tumbling ever since 'taper' was implemented by the Federal Reserve Federal Open Market Committee (FOMC). The tumbling sector was further affected by the FTX crash which sent serious shockwaves throughout the industry.

The tax slabs on crypto are quite high. According to a study by The Esya Centre following the announcement in the Budget 2022 of a 30 per cent tax on income from crypto assets and a one per cent tax deducted at source, a total of INR 32,000 crore in trade volume shifted from Indian crypto exchanges to foreign ones between February and October. The current tax architecture may result in a loss of approximately INR 99.3 trillion of local exchange trade volume over the next four years.

"Cryptocurrency regulation is still evolving and the current focus is on taxation. Capital gains from crypto assets are subject to a flat 30 per cent tax rate without any deductions or offsets. However, cryptocurrency trading is largely unregulated, leading to some uncertainty in the market. Budget 2023 is expected to bring regulatory measures aimed at addressing these concerns," said Sathvik Vishwanath, co-founder and CEO, Unocoin.

An association formed by the founders of Web3 startups called Bharat Web3 Association has asked the government to lower the taxes due to investment diversion to foreign markets as a consequence to high taxes being imposed on the crypto sector.

"The plan will be collate all the issues faced by the Web3 ecosystem currently and prepare a report and present it to the government officials and request for updates in the current set of rules and regulation of the industry," said Amanjot Malhotra, country head, Bitay

Due to the high tax rates for the crypto sector, the talent pool is constantly being raided by foreign jurisdictions and foreign companies. Crypto-friendly jurisdictions allow the talent pool to grow.

NASSCOM data postulates that more than 60 per cent of the 450 Web3.0 startups operating in India are headquartered outside India and 11 per cent of the world's Web3.0 talent resides in India. The taxes have also lead to Indian talent being impacted by way of a domino effect. The dearth of capital for the Web3.0 companies would directly result in the dearth of opportunities for the budding Web3.0 talent pool.

The sector is expecting the following changes in the current tax regime:

• Re-look at the one per cent TDS
• Optimise the 30 per cent tax and allow setoff for losses
• Classify Virtual Digital Asset (VDA) as a regulated asset class

"India should incentivise users to stay within national jurisdiction by reducing the burden of taxes. If the TDS aims to establish a trail of crypto transactions, it can be achieved by a lower TDS rate of 0.1 per cent. Similar to listed securities, existing provisions of capital assets should be made applicable for VDAs. Thirdly, to make India a competitive country in the growing crypto industry, tax authorities should allow carrying forward and setting off losses incurred from the sale of VDAs, similar to how it is done for capital gains," said Ashish Singhal, co-founder and CEO, CoinSwitch.

It remains to be seen what changes the government is set to make in the Union Budget for FY23.