The implications of India’s new cryptocurrency tax legislation and developing its digital rupee
India did not succeed in banning cryptocurrency trading in 2018, but the government has imposed new legislation aiming to limit its use in transactions. The nation has one of the fastest-growing markets for cryptocurrency trading. The volume and scale of crypto trading in the country are high. However, the government does not want cryptocurrencies to be adopted as a conventional form of currency because there are significant security and legal risks. These risks are seen in hacks where millions of dollars have been stolen. Crypto is still not technically considered legal in India.
In February, the federal government decided to recognize cryptocurrencies formally. It imposed a stiff levy on transactions to discourage them. Additionally, the federal government has proposed implementing a digital rupee. The digital currency will be beneficial for making bulk payments, enabling more significant transactions, and having a cheaper management system. It is crucial for investors to consider the impact of the tax on crypto trading in India and its implications around the world.
Central Bank Concerns with Cryptocurrency
In 2018, the Reserve Bank of India banned cryptocurrency trading due to the plethora of security, legal, and operational risks associated with the decentralized asset. However, the country’s supreme court overturned the ban. Since then, the government has sought to crack down on cryptocurrencies.
The Reserve Bank of India has stated that cryptocurrencies threaten the stability and macroeconomic conditions of the Indian economy. The Indian Rupee is partially convertible, which means that transactions require regulatory oversight. The decentralized nature of cryptocurrencies, which can be traded freely and largely anonymously, undermines regulation and authoritative control. The central bank also raised concerns about theft.
Modi Imposed Legislation to Discourage Crypto
Indian Minister of Finance Nirmala Sitharaman stated in her annual budget speech that the magnitude and volume of digital asset transactions in India have made it a critical time to impose new legislation governing the asset. The government will tax income from digital assets. It will levy a 30% tax on any income generated from crypto transactions and the second tax of 1% at the source of all transactions. The government will be treating crypto assets like earnings from gambling. It would place profits from cryptocurrencies in the highest tax band.
However, the volume of crypto trading in India might make it hard for the government to implement this tax effectively. It is estimated that 15 to 20 million crypto investors reside in India. They hold roughly 400 billion rupees in cryptocurrencies. Despite the growth of crypto trading in India, the new tax will be a significant deterrent for crypto trading in the future.
India Plans to Unveil a Digital Rupee
The Reserve Bank of India plans to roll out its digital rupee, called the Central Bank Digital Currency (CBDC), in 2023. Both the digital rupee and cryptocurrency will use blockchain technology, but the currencies are otherwise entirely different. The digital rupee will be the first sovereign-backed digital version of physical cash, unlike cryptocurrency. The digital rupee will be subject to federal government interference and regulation.
China began developing its digital currency, the digital yuan, in 2014. If India’s digital currency is developed and implemented, India will become one of the largest economies with its own digital currency. Some benefits of developing the digital currency include paving the way for more manageable bulk payments and enabling more significant transactions among central banks. It will also boost the digital economy and generate a cheaper and more efficient management system.
The Bottom Line
The Reserve Bank of India and the federal government have opposed the trading of cryptocurrencies for a long time. In 2018, the Reserve Bank of India tried to ban crypto trading, but the supreme court overturned it. Recently, the federal government has set out to impose crucial legislation around cryptocurrencies. The government will impose a 30% tax on any income gained from cryptocurrency transactions, placing crypto transactions in the highest tax bracket. The tax will be a deterrent for crypto trading in the country.
Additionally, the federal government announced that it will begin developing its own digital rupee, which will be rolled out in 2023. Many nations, like China, have begun developing their own digital currency. The digital currency will be beneficial for making bulk payments, enabling more significant transactions, and having a cheaper management system. Despite the development of digital currency, the government and central bank will still oppose cryptocurrency trading. This aspect is crucial for investors to consider when they examine the impact of the tax on crypto trading in India and its implications around the world.