The need to pivot our policy stance towards Crypto

By Lavu Sri Krishna Devarayalu, Kiran Vivekananda 

A brief analysis of the crypto sector’s journey in India would reveal that our national policy has deferred from ignoring the sector to opposing the sector, all while being witness to its meteoric rise. The latest attempts by the Government to curtail its growth included putting onerous tax burden, including introduction of TDS, income tax and not allowing offset of losses. 

However, India still came at number 1 position in the grassroots adoption in the most recent Global Crypto Adoption Index of Chainalysis, an excerpt of which was released a few days back. We were ranked in the top five across all categories such as use of centralised and decentralised exchanges, as well as lending protocols and token smart contracts. As per Chainanalysis, the grassroot adoption figures indicate that Indians are embracing crypto the most. More interestingly, India has also become the second-largest crypto market in the world by raw estimated transaction volume, beating out several wealthier nations, according to the report. This latest report coupled with the discussions and developments in the recently held G20 Summit clearly point towards a relook at the policy stance adopted by Government of India around this sector. 

India’s undeniable potential in Web3 

India has already witnessed immense success in the tech sphere. With one of the world’s largest internet use bases, a young and tech savvy population, and an unparalleled digital public infrastructure, we are an undisputed global tech superpower. In this regard, the rate of crypto adoption in India looks to be a clear sign of our potential to dominate the next generation of the internet. Various estimates suggest that India houses 11% of the global Web3 talent and that this transformative technology can add a whopping USD 1.1 trillion to India’s GDP by 2032. It is imperative that we capitalise on this competitive advantage and embrace Web3 to truly cement our position as a global tech superpower. 

Previously in India, we have been late in realizing the importance of such technological developments. This is an important time for India to embrace this potential and not miss the bus.

Protecting the users and Ensuring a level playing field

The second thing that is apparent from India’s high adoption rate, is that Indians are exploring channels other than centralised domestic exchanges to engage with crypto. These channels may include peer-to-peer (P2P) transfers. There are several routes to conduct P2P transfers, but the most common and accessible is through exchanges that do not have registered offices in India. Industry estimates suggest that cumulative trade volume of around USD 3,852 million (~INR 32 thousand crores) moved from domestic centralized VDA exchanges to offshore ones, during Feb-Oct 2022.

Given that they do not have any registered office in India, such offshore platforms do not comply with any guardrails or safeguards that are placed on crypto activities in India. Although the government has introduced due diligence requirements under the Prevention of Money Laundering Act, 2002; cyber security guidance issued by the CERT-In under the Information Technology Act, 2000; and taxation requirements under the Income Tax Act, 1961 – to name a few, however there is no data to suggest that such offshore platforms are complying with these guidelines. There seems to be a glaring gap between the domestic service providers and the offshore platforms, to the extent that domestic service providers are bearing the brunt of complying with all regulatory requirements even at the loss of their business, as highlighted above.

The government should therefore, focus now to level the playing field and ensure that offshore platforms are complying with the requirements as are our domestic Virtual Asset Service Providers which would go a long way in de-risking consumers and protecting their investments as well.

Need to reevaluate the Income Tax Framework

In July 2022, a mandate to deduct 1% TDS on crypto transfers was introduced with the dual objective of maintaining oversight over the crypto ecosystem and discouraging activity in this space. A 30% tax was also introduced on income from transfer of crypto. India’s top ranking in the Chainalysis Global Crypto Adoption Index is also evidence of the fact that the income tax framework for crypto has failed to achieve its intended objective. Moreover, as per a reply from the Ministry of Finance, only Rs 157.9 crore was received by the government as TDS from the sector for FY 2022-2023 till 20th March 2023. This figure again supports the hypothesis that Indian users are migrating to offshore platforms where there are neither TDS nor compliance requirements. Moreover, the budget also put across that setting off or carrying forward of losses is not allowed for this sector. This provision seems to be difficult to understand, as in the Income Tax Act itself, one can get the benefit of setting off and carrying forward of losses even in the business of owning and maintaining race horses. Are we trying to say that this technology and this sector is less important than owning and maintaining race horses? 

It is, evidently, for these reasons that many startups are now shifting to other nations which not only provide for better regulation but also incentivize the startups as they develop themselves for the future.

Conclusion

There is a pressing need to recognise the potential that Web3 technologies offer to India and Indians, and encourage their adoption through safe and regulated channels. It was a welcome move when the government introduced requirements for VASP to become reporting entities with FIU so that data can be collected and illicit transactions can be flagged. However, putting onerous, burdensome and non-maintainable tax requirements on VASP and users would only discourage them from setting up their investments and startups in India and moving to jurisdictions abroad. The Chainanalysis report could serve as a wake up call for the policymakers, else we would be left with ruminating about “missing the bus” again.

The authors are member of Parliament, Lok Sabha and Chief Public Policy Officer, CoinDCX, respectively

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