On Nov. 1, Finance Minister Nirmala Sitharaman said India was “moving speedily forward” with digital financial technology just as the country launched the pilot program of the Digital Rupee in the wholesale segment.
Nine banks are participating in the pilot, which is expected to make the interbank market more efficient. The country's central bank plans the first pilot of the CBDC for the retail segment within a month in closed user groups.
Sitharaman's remarks came at an annual event organized by the Indian Council for Research on International Economic Relations (ICRIER) on the approaching G20 Conference.
Interestingly, India is gearing up for its one-year stint as the G20 president following a handover from Indonesia in December and will host more than 200 meetings during its presidency. The G20 is a forum of the world's major developed and developing economies. It covers Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the UK, the US, and the European Union (EU).
Undoubtedly, digital assets and the myriad related assets, such as crypto, stablecoins, central bank digital currencies (CBDC), non-fungible tokens, or NFTs, and decentralized finance (DeFi) are among the most popular topics within the financial services sector as regulators around the world increase their efforts to regulate the nascent industry. And for better or worse, crypto is now officially one of the main agendas of the G20.
Crypto as a Priority under India's G20 Presidency
Many times over the last few months, Indian Finance Minister Nirmala Sitharaman said crypto asset regulations would be one of eight key focus areas during the nation's year-long G20 Presidency, which commences next month.
However, Sitharaman called for global collaboration on crypto asset regulations due to the risks crypto poses to global financial stability, citing the borderless nature of crypto transactions.
“No one single country can succeed individually, in a silo and trying to regulate the crypto assets. We need all the G20 members to come onboard to see how best it can be done,” she said at the ICRIER's 14th annual international G20 conference.
Moreover, in her opinion, the International Monetary Fund (IMF), Financial Stability Board (FSB), and Organization for Economic Co-operation and Development (OECD) all need to come together with all the G20 member countries to ensure the regulation of crypto assets.
“I know work has been done by FSB, OECD, IMF, and also the Bank of International Settlements (BIS). So we will have to bring all of them together and then put it on the table for the members to have a meaningful conversation on it,” she said.
Just early last month, the intergovernmental organization OECD developed a framework for cryptocurrencies in response to a G20 request. OECD presented the Crypto-Asset Reporting Framework (CARF), which is meant to exchange information on cryptocurrencies across borders between countries automatically.
This was followed by the FSB releasing its proposed framework for international regulation of activities connected to crypto assets, the first of its kind for the global community. A couple of days later, Sitharaman was reported to have met OECD Secretary-General Mathias Cormann, which was seen as a step in the direction of crypto regulation.
Sitharaman then went on to say that crypto regulation was in India's national interest since the trail of transactions is hard to track. According to her, there is no knowing if crypto transactions are being used to fund terrorism, drugs, or ‘just gaming the system.'
At the same event, V. Anantha Nageswaran, Chief Economic Advisor to the government, said that identifying “consensus-based solutions for accelerating the scale and scope of the response of the global community to many transboundary challenges, such as regulation of virtual assets” would be the third objective under India's G20 Presidency.
India Taxation Authority Proposing New Tax Rules on Crypto Income
At present, cryptocurrencies are unregulated in India. If we look back to 2018, the Reserve Bank of India (RBI) prohibited banks from offering services to crypto companies, which was overruled in 2020 by the Supreme Court of India.
Non-fungible tokens (NFTs), however, have yet to attract the same level of scrutiny as cryptocurrencies, but of course, they also suffer from the same legal uncertainty.
India was supposed to introduce a bill on cryptocurrencies in its winter session of parliament, but the legislation never made it into the House. As of today, India still has no laws to regulate cryptocurrency, but the country does not want to miss the gold rush, and that's why Sitharaman announced the country would be taxing all digital assets in the highest tax bracket at 30% – with no deductions or exemptions.
But on Nov. 1, the Indian taxation authority proposed new tax rules on crypto income, which is likely to affect a large number of people in the country who have been investing in cryptocurrencies. The new rules are said to be in line with the government's efforts to bring greater transparency and accountability to the financial system.
Under the new rules, any income from cryptocurrency transactions will be taxable, significantly impacting those holding virtual digital assets (VDA) or cryptocurrencies and possibly investing in decentralized autonomous organizations (DAO).
The Central Board of Direct Taxes (CBDT) proposed a new common tax return (ITR) to consolidate the existing income tax returns more seamlessly. But its focus is on disclosing income from crypto assets and foreign equity and debt instruments held by resident Indians.
Open to Public Comments
Under the new proposal, CBDT seeks information from Indians residing abroad about the nature of business, any business connections in India, permanent establishment (PE), number of users in India, and whether that entity has a significant economic presence (SEP) in the country, – particularly businesses from which they draw income.
According to Rajat Mittal, a tax counsel in India's Supreme Court advising crypto businesses, this may impact any crypto exchanges that are not incorporated in India but still have Indian traders.
“A lot of Indian customers are on these exchanges, and this might result in Significant Economic Presence (SEP) for these exchanges. If these exchanges have SEP in India, they might be required to discharge the equalization levy,” he said.
Back in 2016, the equalization levy, which is a foreign company operating tax, was introduced to tax digital transactions or income that foreign e-commerce companies made from India. Over the past few years, India continued to expand its scope of it to tax non-resident digital entities.
In the draft, under the income from business or profession, CBDT is asking about net profit and income from Virtual Digital Assets as well as the transfer of virtual digital assets. Moreover, it also mentions the current virtual asset tax rate, which is 30%.
Currently, the CBDT is inviting comments on the proposed changes in the tax form from stakeholders and the general public till Dec. 15, 2022. The new proposal also asks taxpayers questions about their investments in unincorporated entities, which raises the question of whether an investment in a DAO comes under this category.
While the legal position of crypto in the country is unclear and India has not introduced any crypto-specific regulation, the country's residents will have to shell out 30% tax plus surcharge and cess on the transfer of any VDA under the Income Tax Act, 1961 (Income Tax Act).
Moreover, the amendments in Finance Bill 2022 have also directed to levy 1% TDS (Tax Deducted at Source) on Indians buying or selling virtual assets or gifting them. However, these decisions by the government have received criticism from the sector as well as crypto enthusiasts, who see it as a crippling tax regime.