Pre-budget expectations: Ushering a new dawn for crypto in India
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It has been a season of fair winds and following seas for the massive crypto ship in the US and most parts of the world over the past few months. Back home in India, we are heading towards yet another Union Budget and the sector is very hopeful of favourable changes here as well.
The crypto ecosystem in India eagerly awaits policy signals that could shape the future of virtual digital assets (VDAs) in the world’s most populous democracy. While macroeconomic expectations span across taxation relief and infrastructure boosts, the spotlight for crypto stakeholders remains fixed on fostering a progressive regulatory environment. Here, we outline key asks from the government that could catalyse growth in the Web3 and blockchain sectors, enabling India to stake its claim as a global leader in this burgeoning domain.
Crypto in India
India’s tryst with crypto began in the early 2010s when Bitcoin enthusiasts started experimenting with this revolutionary technology. However, it was not until 2016, amidst demonetisation and a surge in fintech adoption, that crypto trading gained traction. The Reserve Bank of India's (RBI) 2018 circular restricting banks from dealing with crypto exchanges marked a turbulent phase, only to be overturned by the Supreme Court in 2020. Since then, the sector has witnessed rapid growth, attracting over 115 million users in India alone by 2023, making it one of the largest markets globally.
Despite this momentum, the regulatory framework remains ambiguous. Introducing a 30% tax on crypto profits and a 1% Tax Deducted at Source (TDS) on all transactions in 2022 dampened market sentiment, resulting in a 90% drop in trading volumes on Indian exchanges. This underscores the urgent need for a balanced approach to regulation.
Rationalising TDS: Gateway to inclusion
The current 1% TDS on every crypto transaction is akin to a brake on innovation and participation. While its intent—creating an audit trail—is laudable, its impact has been counterproductive, discouraging active traders and reducing market liquidity. A reduction to 0.1% or 0.01% would strike a balance, fostering participation while maintaining traceability. With over $3 trillion worth of crypto transactions globally in 2023, rationalising TDS would allow the Indian government to draw from a larger tax pool, strengthening revenues without stifling innovation.
Reduction of tax on profits
India’s 30% flat tax on crypto gains, without provisions for deductions or exemptions, places the sector at a disadvantage compared to traditional asset classes like equities. For context, equity short-term capital gains are taxed at 15%, and long-term gains are taxed at 10% beyond Rs1 lakh. A similar approach for crypto would ensure parity and encourage institutional investments. Countries like Germany and Singapore, with their favourable tax regimes, have successfully attracted blockchain start-ups and capital. India must follow suit if it aspires to be a Web3 powerhouse.
Allowing loss offsetting: A fair ask
In its current form, India’s crypto tax framework disallows the offsetting of losses against gains—a provision readily available for equities and other asset classes. This puts retail investors in an untenable position, penalising them for market volatility inherent to emerging technologies. Allowing loss offsetting would not only make the system equitable but also inspire investor confidence, crucial for long-term growth.
Incentivising Web3 and blockchain innovations
Globally, governments are embracing blockchain for applications ranging from supply chain management to digital identity systems. The UAE, for example, has launched its Blockchain Strategy 2021 to save $3 billion in operational costs annually. India, with its robust tech ecosystem and youthful workforce, is well-positioned to lead this digital transformation. By offering tax holidays, grants, or R&D credits, the government can attract top-tier Web3 companies to innovate within India.
Clarity and consistency in regulation
The crypto ecosystem thrives on clarity. Ambiguity, by contrast, deters innovation and investment. Clear guidelines outlining permissible activities, licensing norms, and a framework for Initial Coin Offerings (ICOs) could pave the way for more transparent operations. Countries like Japan and Switzerland have demonstrated how clear regulations can coexist with robust investor protection. A well-regulated market is India’s best bet to counter risks like money laundering without undermining innovation.
Broader implications for the economy
The benefits of a crypto-friendly budget extend beyond the ecosystem itself. Blockchain-enabled systems can reduce inefficiencies in governance, streamline public services, and secure financial transactions. As per a World Economic Forum report, blockchain could add $1.76 trillion to global GDP by 2030. India’s share of this economic opportunity could be immense, provided the right policies are in place.
Allusions to the past: Lessons from IT and Fintech
India's IT revolution in the 1990s and its fintech boom in the 2010s offer valuable lessons. Strategic policy support—ranging from tax incentives to infrastructure development—turned these sectors into global success stories. Crypto, often referred to as the "Internet of Value," could be the next chapter in India’s tech narrative, but only if nurtured appropriately.
A call to action
As the Union Finance Minister prepares to unveil the Union Budget, the crypto community hopes for a pragmatic approach that balances innovation with oversight. Rationalising taxes, offering loss offsetting, and promoting blockchain adoption are not just sectoral demands; they are economic imperatives.
India stands at a crossroads. With over 65% of its population under the age of 35, the country has a unique opportunity to channel its demographic dividend into building a blockchain-driven economy. Will this budget unlock the true potential of crypto? The answer could define India's economic trajectory for decades to come.
(The author is the CEO of Giottus, an Indian crypto exchange. Views expressed are personal).