Dilemma in taxation of digital assets
It has been a long disputed subject that whether crypto currency is legal in India. RBI always had concerns about it’s ill effect on economy and the possibility of transaction by means other than the legal tender issued by it, would take control out from it’s hands. It therefore banned any transactions based in crypto up until the Supreme Court then reversed the order. RBI didn't allow it because they feared it’s economic effect and if traders starts to use it as a currency to transact with, the monitoring of transactions will be difficult and the economic stability would be destructed. Also RBI didn’t understand it at the beginning and hence wanted to remove it entirely from the system so that any future trouble could be avoided.
But it is never possible to cage a new idea forever. It was tried when internet was introduced and has been trying for everything mankind finds new. Everytime one way or another the new idea and technology sprouted amidst suppression.
However, central government then planned to bring crypto currency and all other digital assets under it’s regulations through a bill that is under development because crypto seems to have growing at a pace anyone couldn't have imagined around the world. India has around 10 crore crypto users that is growing as we see it and it’s not been used as a currency yet rather as an investment that could be sold and purchased. So, it’s not a currency and it has no legal status and it only act as a stock in nutshell for now. El-Salvador, the Latin American country, has accepted Bitcoin as it’s currency as it’s central bank decided that, it could save millions of dollers that are being charged as transaction cost, when it’s citizens send money to the homeland from abroad. The country primarily dependent on such foreign currency inflow for its GDP. It’s central bank paid around $47500 per Bitcoin purchase, that now has value of around $37000, that means Salvadorian lost around 23% of it’s value. RBI is concerned about this instability of value.
The crypto users were hit hard when the finance minister proposed to tax any gain on digital assets at 30% which is the highest slab rate there is. Opposition parliamentarians bombarded with questions that how could it be taxed when it is not regulated at any level in India, there is not even a bill passed in this regard to define or regulate digital asset transactions and dealings and why wasn't that the RBI the body to decide on this issue.
However, it’s a fact now that there is a legal clarity that crypto currency and other digital assets like NFT are allowed as assets in India and it is legal to transact in those which is a good news amidst the taxation. Only restriction is that crypto currency is an assets and never a currency to be allowed to transact as it is highly volatile, it affects the economic stability of the country that RBI controls from time to time through monetary policies and to discourage terrorist funding and money laundering. By taxing government indirectly approved the investment in digital assets.
Question is, does the decision going to backfire on the government in future. The crypto exchanges soon will be liable to report every transactions whether buying or selling to the income tax department, like any other reporting entities do. But taxing the digital assets would prompt the investors in India to invest through exchanges in other countries and thereby escape the vulture eyes of CBDT. Of course the intention is to discourage crypto transactions and by taxing it government finds an extra mode for revenue and discouragement of such transaction. But if investors uses overseas exchanges to be anonymous and save tax burden, it would be a teething problem, both as Indian government lose a new technology and the revenue that they expected it would raise. Conversely, it would be a Kickstarter in India, that it is not illegal and even though it is taxed the government is ready to accept it as legitimate asset when lots of countries kept silent on the matter. That could be an optimising factor for crypto investors.
Understanding a new technology is paramount before regulating it. Crypto currency and digital assets such as NFTs might be only a bubble like the “Duch Tulip mania” and only there for a shorter period before it blows off. Or it could be the future that changes the way we see how the currency system works. Taxing heavily on such ideas for discouraging or just because it is so complicated to understand and regulate, only makes it grow further or lets the discovery of ways to prevent it’s taxation. It had to be defined first and tried to be learnt in it’s deeper level before making an unexpected heavy burden on to digital assets. Because this technology has not even started to come out of it’s womb to show it’s real potential or what it is capable of, it would be wiser to tread carefully.