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Budget 2024: From tax cuts to regulatory clarity, here’s what the cryptocurrency industry expects
Budget 2024: The crypto industry expects Finance Minister Nirmala Sitharman to announce several favourable measures in the upcoming Union Budget, including reduction in transaction taxes, provision of loss relief, equal treatment of capital gains from crypto assets and other sources of income, and establishment of a favourable regulatory regime.
The Budget 2022-23 introduced regulations mandating that gains from virtual digital assets (VDAs) or crypto assets will be taxed at a flat rate of 30%, irrespective of the individual’s income tax rate. In addition, a 1% tax deducted at source (TDS) has been imposed on every transfer of such assets.
However, despite these new regulations, the government has not clarified the legality of these assets, a long-standing demand from the industry.
“As the government gears up for the upcoming Union Budget 2024-25, we urge it to create an enabling regulatory and fiscal environment that supports the burgeoning digital economy and fosters innovation. The current tax framework for virtual digital assets, introduced over two years ago in the February 2022 budget, has led to unintended consequences even for the government and the exchequer, primarily through a massive shift of VDA transactions to offshore platforms, impacting the tracking and tracing of these transactions,” said Ashish Singhal, Co-Founder, CoinSwitch.
Rajagopal Menon, Vice President, WazirX, expects reduction in TDS on VDA transfer, set-off and loss carry forward, and equal treatment of VDA income in the upcoming Budget 2024-25.
Reduction of TDS on the transfer of VDAs
One of the key demands is to reduce the TDS rate on transfer of virtual digital assets under Section 194S to 0.01%. Currently, the higher TDS rate of 1% is acting as a deterrent to investors, leading to reduced liquidity and market participation. Reducing the TDS rate would encourage more transactions and foster a healthier business ecosystem. Further, it is recommended to revise the tax deduction threshold under Section 194S, increasing it from ₹50,000 to ₹5,00,000.
Compensation and carryover of losses
The crypto community has been advocating for the ability to offset and carry forward losses, similar to other industries. Currently, losses from VDA trading cannot be carried forward to offset future VDA gains or any other source of income, which discourages long-term investment and strategic trading. Allowing this flexibility would align the cryptocurrency market with other financial markets, fostering a more stable and investor-friendly environment.
Equal treatment of VDA income
Another important request is to treat income from the transfer of VDA on the same basis as existing income sources. This involves recognizing and taxing crypto income like traditional forms of income, such as stocks or mutual funds. Such a change would simplify tax compliance for crypto investors and help legitimize cryptocurrencies as a mainstream asset class. In addition, industry representatives noted that amending Section 115BBH to reduce the tax rate from 30% to a rate comparable to other sectors would be a welcome improvement.
Call to the Regulatory Body
In addition to the mentioned financial adjustments, there is a growing call for the creation of a dedicated regulatory body to oversee crypto transactions. Such an institution would ensure transparency, protect investors, and provide clear compliance guidelines, thereby promoting market trust and stability.
While the industry has welcomed the definition and inclusion of VDAs in the Income Tax Act, certain provisions, such as the high TDS rate and lack of clearing, have led many Indian VDA users to migrate to non-compliant foreign exchanges to transact. This exposes them to the risk of losing their investments and violating the law, leading to reduced tax revenue for the exchequer.
The Reserve Bank of India’s June 2024 Financial Stability Report (FSR) highlighted the implications of decentralized finance (DeFi) for financial stability, aligning with global regulatory efforts to create a safe and stable environment for digital assets. In the run-up to the Union Budget, incorporating these insights by establishing a robust regulatory framework under the Securities and Exchange Board of India or the RBI can help mitigate stability risks in the DeFi and digital assets space, ensuring that India remains competitive in this evolving global market.
The crypto community is hopeful that the finance ministry will consider these proposals, leading to positive outcomes in the Union Budget 2024-25. Implementing changes such as reducing TDS and allowing set-off and carry-forward of losses would encourage wider participation in the crypto market. According to industry experts, a conducive regulatory environment is essential to drive innovation as it allows the industry to transform existing businesses through the integration of blockchain technology.
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