Analysis | Why India Blows Hot and Cold in Dealing With Crypto

1. What did the government do?

Since April 1, any gains on the transfer of crypto assets are taxed at 30%, a higher rate than in many other jurisdictions including the US and the UK. Trading losses can’t be offset against income, even from a different token. In July, the government added a further 1% tax — to be deducted at source — on digital-asset transfers worth over 10,000 rupees ($125) or on a combined 50,000 rupees of transactions over a single financial year. 

The 1% transaction tax known as TDS, seen as unique in the crypto industry, hurt market makers and high-frequency traders who accounted for a big chunk of trading volume. Trading on three exchanges — ZebPay, WazirX and CoinDCX — slumped by between 60% and 87% after the tax took effect, data from CoinGecko show. A typical high-frequency trader could see around 60% of their capital frozen for TDS payments after just 100 trades, according to Manhar Garegrat, former executive director of policy at crypto exchange CoinDCX. 

3. What was the point of the move?

The collapse in crypto trading means the government is unlikely to reap much revenue from the new levies. What it does do is give state officials a way of tracking activity on many crypto platforms. Since many of the digital tokens have an element of anonymity, officials are concerned they could be used for terrorist-financing, fraud and other illicit activities. There’s also the risk that an unregulated environment could draw more domestic household savings toward the volatile assets, leaving savers vulnerable to a crash. 

4. Was the tax decision unexpected?

Not really. India has had a hot-and-cold relationship with digital currencies. The government is keen to promote crypto’s distributed ledger technology, known as blockchain. However, in 2018, the Reserve Bank of India barred banks from holding crypto or facilitating crypto transactions. The Supreme Court struck that down in 2020, but the regulatory uncertainty has endured and Indian banks are still hesitant to work with crypto startups. Government officials and financial regulators continue to warn of crypto’s risks, with RBI Deputy Governor T. Rabi Sankar likening cryptocurrencies to Ponzi schemes and suggesting they should be banned. Finance Secretary T. V. Somanathan said India is treating crypto trading like earnings from gambling and speculation. 

5. Did trading stop or just go elsewhere?

It’s hard to tell as there’s a lack of data. Local exchange WazirX said long-term crypto holders were still buying and selling, but that others were migrating to foreign trading platforms or dealing directly with one another over so-called decentralized exchanges to avoid the tax. 

6. How big was crypto in India?

Investments in crypto in India grew from about $923 million in April 2020 to nearly $6.6 billion in May 2021, according to Chainalysis. The country’s population of 1.4 billion people skews young, with a growing, well-educated middle class. That, combined with a less-developed traditional financial system, led to the world’s second-highest crypto adoption rate behind Vietnam, Chainalysis data showed. By November last year, India had over 15 million registered crypto users with total assets worth $6 billion, the chairman of parliament’s finance committee said. By comparison, 34 million US adults are expected to own a crypto asset by the end of 2022, according to estimates from Insider Intelligence. 

While China has banned crypto transactions entirely, India is yet to introduce a bill defining digital assets and decide how to regulate them. Finance Minister Nirmala Sitharaman has said any legislation can be effective only with international cooperation to prevent so-called regulatory arbitrage, whereby companies shop for the most lenient jurisdiction to do business. The uncertainty is sending a chill through the clusters of Indian startups developing products based on blockchains, from decentralized finance applications to nonfungible tokens. It’s also unclear how India’s digital rupee, due for launch in 2023, will impact the industry. RBI deputy governor Sankar said in June that central bank digital currencies could “kill whatever little case that could be for private cryptocurrencies.”

More stories like this are available on bloomberg.com