For Indian Crypto Investors, Will Union Budget 2023 Be a ‘Messiah’?

With the Union Budget 2023 just around the corner, crypto enthusiasts across India are eagerly awaiting to see how the finance ministry will approach the virtual digital assets (VDAs) sector this time around.

The hard stance maintained by the Reserve Bank of India (RBI) against digital assets, along with the recent FTX massacre, has caused a wave of uncertainty among Indian crypto investors and firms alike.

RBI first imposed a ban on banks providing services to anyone dealing with cryptos in 2017. This move was reversed in 2020 by the Supreme Court of India (SC). RBI and the government still remain cautious towards virtual currencies, even after declaring cryptos as virtual digital assets under the Income Tax Act, 1961.

How Governments Around the World Are Tackling?

The protection of consumers and addressing pseudonymity in the crypto ecosystem are two areas of utmost concern for governments worldwide. In response to this, regulatory initiatives have been taken by both the European Union and the US to outline more comprehensive and robust guidelines for crypto assets.

The European Union’s Markets in Crypto Assets (MiCA) bill, which is currently pending in the European Parliament, seeks to introduce a harmonized legal framework for three sub-categories of crypto assets—e-money tokens, asset-linked tokens and all other cryptos such as utility tokens—while also establishing regulations for related service providers and issuers.

Similarly, the US has proposed the Responsible Financial Innovation Act to tackle various aspects of the crypto sector such as the environmental impact caused by cryptoassets, the prospect of constructing a proper taxation system as well as the regulation of decentralized autonomous organizations (DAOs) that make use of digital assets to manage their operations. Thus, India could follow a similar approach.

Union Budget 2023: The Last Hope

A recent study released by Delhi-based think tank Esya Centre has revealed that India’s current tax architecture could lead to a staggering loss of approximately INR 99.3 lakh crore in local exchange trade volume by 2027. The research indicated that following the 30 per cent tax on crypto gains, trade volume to the tune of INR 32,000 crore has already shifted from Indian exchanges to foreign platforms.

Crypto investors in India have called on the government to review existing income tax provisions in order to make investing in cryptocurrency a more attractive proposition. Not only is this imperative in light of the skyrocketing crypto prices of late, many Indian investors are sitting on lifetime gains which could be taxed, something that could make them reluctant to invest further in the future. Favourable tax policies would also ensure that the sector continues to thrive and grow. To this end, it is pertinent to draw an example from the US, where regulations have been put in place to protect investor interests. These regulations include minimum trade size and protection from market volatility, furthering investor confidence and trust in the sector.

In addition to a secure environment, favourable regulations will also bring India closer to occupying a greater share in the global crypto investment market. With tremendous potential to become a major crypto player, favourable regulations are needed to encourage both foreign and home-grown investors alike to engage in cryptocurrency investments.

It is essential that there is clarity on taxation and regulatory issues in the upcoming Union Budget. This would further steps towards establishing progressive guidelines that could be followed properly and understanding the varying use cases of cryptos. Along with this, it is important to have clarity on applicable tax rates, TDS/TCS, and GST implications for the buying and selling of cryptos.

The Indian leadership has consistently recognized that emerging technologies such as blockchain should be dealt with in a globally harmonized way, rather than relying on inadequate piecemeal approaches for different national jurisdictions. Taking into account the inherent borderless nature of virtual digital assets (VDAs), India should consider recognizing these assets as a ‘commodity’ or separate asset class to be regulated by an independent body, either an existing one or an entirely new one specifically created for this purpose.

This will help establish a well-regulated ecosystem for investor protection that includes proven protocols, disclosures and certifications. Additionally, the government can take other measures to increase transparency in VDA–related transactions by implementing certain safeguards and initiating necessary certifications. Doing so will ensure the smooth functioning and secure exchange of VDAs until the international community can achieve a higher level of clarity regarding crypto assets.

Will G20 Be a Game Changer?

The forthcoming Union Budget could reflect the crypto regulatory approach India will favour, which could be discussed further within the G-20. Needless to say, regulations for crypto will bring transparency and accountability to the crypto ecosystem, providing a stable foundation for the development of the space.

Under India’s G20 presidency, one of the priorities set by the Reserve Bank of India (RBI) is to develop a comprehensive global regulation framework to mitigate the risks associated with crypto assets, stablecoins and Decentralised Finance (DeFi) technologies