If there was one major highlight of Budget 2022 for taxpayers, it was its verdict on crypto taxation. The Budget stated that gains from the transfer of Virtual Digital Assets (VDA) which include cryptocurrency, NFT & others would be taxed at a 30% rate.
Now, this was a bittersweet moment for taxpayers and crypto enthusiasts. Sweet because it cleared much of the mystery that crypto taxation was shrouded in. Bitter because…well 30% tax is steep, to say the least.
Also, just because income from cryptocurrency is taxable, doesn’t mean cryptocurrency is legal in India…not our words…that’s what our Finance Minister Nirmala Sitharaman said😅
GST on Cryptocurrency
Now while the Budget did provide some much-needed clarity on Crypto taxes, it just dealt with one part of it. There are other crypto-related activities where the verdict is still ambiguous. For example, there is still a lack of clarity on how certain other activities like Crypto Derivatives trades, crypto skating would be taxed.
But looks like the government is gearing up to come down heavily on crypto allied activities too. Let’s take a look at the crypto exchange platforms for example.
Rajya Sabha Member Sushil Modi has said that the government levies 18 % GST “only on service provided by the crypto exchange and is treating it as financial services.” However, in his opinion, cryptos are akin to gambling and betting and hence it should be treated similarly by imposing a 28% GST on the entire transaction of crypto.
Further, at the beginning of the year itself, we saw DGGI raiding Cryptocurrency exchange platforms like WazirX on grounds of tax evasion
After Cryptocurrency exchange WazirX, offices of major Cryptocurrency service providers across the country are searched by Directorate General of GST Intelligence officials. Massive tax evasion was detected by DGGI. More details awaited: Official Sources told ANI— ANI (@ANI) January 1, 2022
Currently, the government is also mulling over imposing on GST on crypto mining. Mining is essentially the process through which new cryptocurrencies are introduced into circulation.
The cynicism regarding cryptocurrency seems to be quite widespread among the political and economic elites of our country. RBI Deputy Governor T Rabi Sankar believes that Cryptocurrencies can wreck the banking system, undermine monetary policy and has even asked for an outright ban on cryptos altogether. Ouch! That Hurts
The steep taxation is definitely a step to dissuade people from indulging in cryptocurrency.
Looking at our portfolio, all we can say is at least we don’t have to pay taxes as long as we are in losses.😢
Enter Digital Rupee
However, what is interesting is that the government’s aversion to cryptocurrency doesn’t translate into its aversion to the technology behind cryptocurrency i.e. blockchain technology.
In fact, another key announcement made in Budget 2022 was that the government will be introducing CBDC i.e Central Bank Digital Currency or e-rupee using blockchain and other technologies.
We understand that this opens a pandora’s box of questions. What is CBDC, will it not be the same as UPI, is it going to be like bitcoin, ….the list goes on. Let us understand all these complex concepts one by one
What is CBDC?
To put it very simply, CBDC or Central Bank Digital Currency is going to be the digital form of the physical cash issued by the RBI. It will be a legal tender issued by the RBI and it will do everything that your normal physical cash does, namely act as a medium of exchange, store of value…you get the drift.
It sounds like UPI transactions, how is it different?
Well, with UPI the mode of transaction is digital i.e instead of physically giving cash to someone, we are doing it through our phones. However, what we are exchanging is essentially the cash that we have in our bank accounts. So UPI transitions are still backed by the cash deposits we have in our bank account.
Remember the message that is displayed when you pay your friend for your share of the pizza? Xxx Bank account has been debited for Rs 350 via UPI. So yeah, the bank account still remains in the picture.
However, with CBDC banks won’t come into play. The CBDC will be stored in your smartphone’s wallet and you will be directly transferring the CBDC instead of the cash in your bank.
Wow! That sounds quite a lot like bitcoin and other cryptocurrencies
It actually is. It will use blockchain and other technologies that are commonly used in the crypto world. In fact, one of the reasons for introducing CBDC is to meet the public’s need for digital currency which is reflected in the craze for private cryptocurrencies.
However, there are some key differences, the main one being centralisation. The main USP of crypto is its decentralisation and anonymity. CBDC will turn this on its head. Only the RBI will be able to mine CBDC and each unit is expected to have a unique identification number. Hence the entire process will be centralised and there will be hardly any room for anonymity.
Secondly, in India, cryptocurrencies are not currencies. We can’t use them as a medium of exchange. However, CBDCs will definitely become a medium of exchange.
Finance Minister said that CBDC would provide a significant boost to the digital economy and a few of its benefits appear to be quite obvious
- Unlike physical cash, e-rupee will have no risk of getting torn, burnt or mutilated. Its lifecycle will be endless
- The government will significantly be able to reduce the cost of printing and circulating cash
- Common people might find CBDC more attractive as it will not carry the risk of losses that are associated with commercial banks
- Payments might become instantaneous and hassle-free
- Sending money across borders will become much easier
- The government will be able to track transactions and hence money laundering and other kind of financial frauds can be brought under control
While there may be significant benefits associated with Digital rupee, there are a few open questions too
- Right now, we are all accusomted to deposting our money in banks. For banks the more deposit they have, the better is it for them as it will enhance their lending capacity and subsequently drive more profits. Now, with the coming of digtal rupee, people might choose to keep a part of their money with banks and keep the rest of it with themselves in the form of digital currency. Now, a dwindling depostit might make it difficult for the banks to survive in the long run & that is something needs to be worked out.
- The concept of money is a social phenomenon as well. A lot of people associate the value of money with its physical presence, the promise note mentioned on it and so on. The digital rupee will not have a tangible presence and this might lead to skepticism especially among people who are not very accquainted with technology. Hence, the acceptability of digital rupee among the masses is something we have to grapple with.
- Introduction of Digital Rupee will come with its fair share of technological challanges as well. Issues of speed, scalibility, audatibility and security need to be balanced and perfected before introducing digital rupee to the masses.
CBDC no doubt bring about a huge change in the entire monetary system of the country. However, there are a lot of creases that are yet to be ironed out before diving headfirst into this initiative.