India’s Annual Budget Calls for 30% Tax on CryptocurrencyNation to Issue Own Blockchain-Based Central Bank Digital Currency This Year
Indian Minister of Finance and Corporate Affairs Nirmala Sitharaman presented India’s Union Budget 2022 to the Lok Sabha (House of the People) on Tuesday.
A prime focus for fiscal 2022-23 is the promotion of technology-enabled development. One of the key highlights was the announcement that the Reserve Bank of India will introduce a blockchain-based Central Bank Digital Currency, or CBDC, this year.
Sitharaman's statement on the introduction of the digital rupee finally lays to rest the speculation surrounding the government's stance on crypto asset regulation.
In her budget speech, Sitharaman made it clear that while the possession and transaction of crypto assets will not be deemed illegal, they will not be recognized as a currency.
In the post-budget press conference, Sitharaman said that a form of payment - be it crypto or otherwise - becomes a currency only when it is issued by the central bank. "We loosely refer to it as cryptocurrency, but it is not a legitimate currency," she said.
The CBDC that the Reserve Bank will introduce this year will be the only legitimate digital currency in India, she said, and everything outside of it will be considered an asset and not a currency.
To dissuade investments in any other form of digital asset apart from the CBDC, the government will be heavily taxing profits made through the buying and selling of crypto assets.
"If profits are being made in transacting those assets, we'll be taxing those profits at 30%," Sitharaman said.
In addition, any transaction in the crypto space will attract 1% TDS - tax deducted at the source. Nonfungible tokens, or NFTs, will also be subject to the new taxation rule.
Sitharaman was asked how crypto assets could be taxed without a formal crypto regulation in place. She responded: "We don't wait for regulations to come into effect for taxing people who are earning profits."
The finance minister did not specify a date when the crypto regulation will come into effect. "We've circulated a paper. Inputs are coming in. Public stakeholders are also talking about it. That's the normal process for introducing regulations," she said.
Taxation of Crypto Assets Gets Mixed Response
Industry leaders have contrasting views about the heavy taxation of crypto assets. Kavita Shenoy, CEO & founder of Indian SaaS startup Voiro, tells Information Security Media Group: "It's encouraging to see the government thinking ahead in terms of areas like cryptocurrency and digital assets. These are technologies that are still in their nascent stages, but with massive potential."
Sumit Gupta, founder and CEO of CoinDCX - India's largest cryptocurrency exchange - says in an article published in The Economic Times: "The finance minister presented a budget that was progressive and futuristic, highlighting India's focus on digital innovation and promoting blockchain technology."
Although he says the taxation of crypto assets adds clarity and confidence to the industry, he says the government has taken "two steps forward and one step back" because of its decision to subject earnings from crypto assets to a 30% tax.
To put this into perspective, winnings from lotteries and game shows in India are subjected to a 31.2% tax. "Trading crypto requires specific skills and cannot be compared to gambling. The tax rate should have at least been the same as it is for other asset classes. The proposed 30% tax may hamper wider adoption," Gupta says.
Are RBI's Concerns Around Cryptocurrency Justified?
The Reserve Bank of India has been vocal in expressing reservations about legitimizing cryptocurrency in India. In the past, India's central bank and regulatory body highlighted concerns about cryptocurrency causing economic instability and elevating cyber risk.
In RBI's Financial Risk Report released in December 2021, the country's governing bank observes that private cryptocurrencies pose immediate risks to customer protection, anti-money laundering and combating the financing of terrorism. "They are also prone to fraud and to extreme price volatility, given their highly speculative nature," it says.
And RBI's Financial Action Task Force says that anonymity-enhanced cryptocurrencies, mixers and tumblers, decentralized platforms and exchanges, and privacy wallets reduce transparency and increase obfuscation of financial flows.
Also in December, RBI Governor Shaktikanta Das said cybersecurity and digital fraud are the main challenges in the adoption of digital currency, including crypto assets.
RBI is not alone in expressing concerns around the cybercrime and cyber risk aspect of crypto transactions. Last week, Democratic lawmakers in the U.S. proposed a ban on financial institutions, including regulated exchanges, engaging in crypto transactions The proposal was met with stiff resistance from crypto investors (see: Crypto Advocates Decry Bill That Could Ban Transactions).
Addressing RBI's concerns around crypto transactions, Karl Steinkamp, director of digital transformation and automation at Colorado-based security advisory firm Coalfire, tells ISMG that many countries have been looking at issuing their own sovereign digital currency - CBDCs - as a form of legal tender for their citizens.
"Many of these countries, India included, have a perceived misconception that Bitcoin will upend the financial system. Sovereign or fiat currencies - digital or otherwise - can operate alongside crypto assets like Bitcoin," Steinkamp says.
A key development in the cybercrime space, especially when ransomware is involved, is that Bitcoin transactions - which until recently were considered untraceable - can now be tracked by almost anyone.
Steinkamp says that without some form of mixing or obfuscation technologies, Bitcoin transactions are natively public and searchable by any entity. "There are many public and free blockchain explorers that allow anybody to follow a transaction based on a specific crypto asset address," he says.
Sharing his viewpoint on whether cryptocurrency regulation can have a positive impact on fraud and cybercrime, John Bambenek, principal threat hunter at California-based digital security company Netenrich, tells ISMG: "The war on drugs didn’t stop the flow of drugs into the United States. It is doubtful that regulation on cryptocurrency will have any real impact on the underlying cybercrime involved in many cryptocurrency transactions."
But Roger Grimes, data-driven defense evangelist at Florida-based cybersecurity advisory firm KnowBe4, tells ISMG that banning cryptocurrencies will deter ransomware groups. He points out that barring a handful of countries such as El Salvador, most countries have not recognized cryptocurrency as legal tender.
"If cryptocurrencies are outlawed, or let's say just the practice of paying ransom extortions using cryptocurrencies, it would have a devastating impact on ransomware criminals in those countries," Grimes says.
Echoing Steinkamp's view, he adds, "Once law enforcement is able to put an identity with a wallet, the bad guys need to watch out, because their days are numbered."
Budget Proposals Affecting IT, Cyberspace
The underlying reason for the introduction of the digital rupee is to boost the adoption of digital banking and financial inclusion, Sitharaman says. The government proposes setting up 75 digital banking units in 75 districts of the country by scheduled commercial banks.
Sudhesh Chandrasekar, chief financial officer of India-based digital payments company Slice, says that several initiatives in the budget are directed toward the country's financial inclusion agenda. He tells ISMG that the government's continued focus on digital payments and digital banking will contribute to making the entire ecosystem "far more robust."
The Union Budget 2022 also includes proposals that affect cyberspace. They include the development of infrastructure for data centers, promotion of 5G through production-linked incentives, the drive toward making India a hub for manufacturing semiconductors, and the introduction of e-passports with embedded chips.
"An infrastructure status for the data center industry means that data localization and affordability of high-end data centers will be more accessible now. For Indian businesses, it offers a chance to avail long-term data center services at lower investment rates," Sanjay Motwani, vice president - APAC at Legrand Data Center Solutions, tells ISMG.
Satya Gupta, president of the VLSI Society of India and an adviser to the India Electronics and Semiconductor Association, tells ISMG that e-passports with embedded chips and design-led manufacturing of 5G devices will provide the "wind under the sails" for India's ambitious semiconductor policy and says, "This bold budget will make India self-reliant in the electronics and semiconductors industry much sooner."
Regarding 5G rollout, Mahendra Nahata, managing director at India-based telecom company HFCL, tells ISMG: "We believe that the expected spectrum rollout for 5G in 2022, combined with a scheme for design-led manufacturing for 5G equipment under the PLI scheme will not only lead to advancement in the sector but will also help to create employment opportunities."