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Budget 2024: From Tax Cuts to Regulatory Clarity, Here’s What the Cryptocurrency Industry Expects
Budget 2024: The cryptocurrency sector is expecting Finance Minister Nirmala Sitharman to announce several favourable measures in the upcoming Union Budget, including a reduction in transaction taxes, provision for loss offsetting, fair treatment of capital gains from cryptocurrencies and other sources of income, and the establishment of a supportive regulatory regime.
The Budget 2022-23 has introduced rules requiring that earnings from virtual digital assets (VDA) or crypto assets will be taxed at a flat rate of 30 percent, irrespective of the individual income tax rate. In addition, a tax withheld at source (TDS) of 1 percent has been imposed on every transfer of such assets.
However, despite these new regulations, the government has not clarified the legality of these goods, a long-standing demand from the industry.
“As the government gears up for the upcoming Union Budget 2024-25, we urge it to create an enabling regulatory and fiscal environment that supports the burgeoning digital economy and promotes innovation. The current fiscal framework for virtual digital assets, introduced over two years ago in the February 2022 budget, has led to unintended consequences for the government and the exchequer as well, primarily through a massive shift of VDA transactions to offshore platforms, impacting the monitoring and traceability of such transactions,” said Ashish Singhal, Co-Founder, CoinSwitch.
Rajagopal Menon, Vice President, WazirX, expects TDS reduction on VDA transfer, set-off and carry-forward of losses and equal treatment of VDA income in the next fiscal 2024-25.
Reduction of TDS in VDA transfer
One of the key demands is to reduce the TDS rate on transfer of virtual digital assets under Section 194S to 0.01 percent. Currently, the higher TDS rate of 1 percent acts as a deterrent to investors, leading to reduced liquidity and participation in the market. Lowering the TDS rate would encourage more transactions and foster a healthier trading ecosystem. Additionally, it is recommended to review the threshold limit for tax deduction under Section 194S, increasing it from ₹50,000 to ₹5,00,000.
Offsetting and carry-forward of losses
The cryptocurrency community is advocating for the ability to offset and carry forward losses, similar to other industries. Currently, losses from VDA trading cannot be carried forward to offset future gains from VDA or other sources of income, discouraging long-term investment and strategic trading. Allowing this flexibility would align the cryptocurrency market with other financial markets, fostering a more stable and investor-friendly environment.
Equal treatment of income from ATVs
Another significant request is to treat income from VDA transfers on a par with existing sources of income. This would involve recognizing and taxing cryptocurrency income like traditional forms of income, such as stocks or mutual funds. Such a change would simplify tax compliance for cryptocurrency investors and help legitimize cryptocurrency as a traditional asset class. Additionally, industry representatives noted that amending Section 115BBH to reduce the tax rate from 30 percent to a rate comparable to other industries would be a welcome improvement.
Call for Regulatory Body
In addition to the financial adjustments mentioned, there is a growing demand for the establishment of a dedicated regulatory body to oversee crypto transactions. Such an institution would ensure transparency, protect investors, and provide clear compliance guidelines, thereby promoting trust and stability in the market.
While the industry has welcomed the definition and inclusion of VDAs in the Income Tax Act, certain provisions like the high TDS rate and lack of clearing have led many Indian VDA users to migrate to non-compliant foreign exchanges for trading. This exposes them to the risk of losing their investments and breaking the law, resulting in reduced tax revenues for the exchequer.
The Reserve Bank of India’s June 2024 Financial Stability Report (FSR) highlighted the implications of decentralized finance (DeFi) for financial stability, aligning with global regulatory efforts to create a safe and stable environment for digital assets. As the Union Budget approaches, integrating these insights through the establishment of a robust regulatory framework at the Securities and Exchange Board of India or RBI can help mitigate stability risks in the DeFi and digital asset space, ensuring that India remains competitive in this evolving global market.
The cryptocurrency community remains hopeful that the Ministry of Finance will consider these proposals, leading to positive outcomes in the Union Budget 2024-25. The implementation of changes such as lower TDS and the ability to offset and carry forward losses would encourage wider participation in the cryptocurrency market. According to industry experts, a supportive regulatory environment is crucial to spur innovation as it enables the industry to transform existing businesses through the integration of blockchain technology.
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