Author | TaxDAO
1. General Tax System in India
The tax collection power in India is mainly concentrated between the federal central government and the states, with a small amount of tax collection power at the local city level government. The types of general taxes in India include direct taxes and indirect taxes. The main types of taxes include income tax, capital gains tax, and goods and services tax.
【Income Tax】The federal central government levies income tax on individuals, businesses, and other entities. Personal income tax adopts a progressive tax rate based on the income level, with tax rates ranging from 0% to 30%. Corporate income tax is levied at a fixed tax rate based on different types of enterprises and revenues. Domestic companies with annual turnover not exceeding 25 billion Indian rupees pay a tax rate of 25%. Domestic companies with annual turnover exceeding 25 billion Indian rupees pay a tax rate of 30%. Foreign companies are subject to a tax rate of 40%.
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【Capital Gains Tax】Capital gains obtained by individuals and businesses from the sale of certain assets need to be taxed. Capital gains tax includes short-term capital gains tax and long-term capital gains tax. Short-term capital gains refer to the profits derived from assets held for less than one year, and are subject to applicable personal income tax rates. Long-term capital gains apply to specific asset categories such as stocks, funds, real estate, etc. According to the latest tax regulations, long-term capital gains tax applies to the portion of capital gains exceeding 100,000 rupees, at a tax rate of 20%.
【Goods and Services Tax (GST)】is an indirect tax mainly levied on businesses and commerce. Enterprises need to pay appropriate taxes to the government when selling goods or providing services. It replaces the original consumption tax, service tax, and value-added tax, and simplifies the tax procedure to avoid duplicate taxation. GST is divided into different tax rates based on the category of goods or services, mainly including standard rate, lower rate, and zero rate.
In addition, the general tax system in India also includes other types of taxes. For example, securities transactions require payment of securities transaction tax based on the transaction rate; real estate transactions require payment of stamp duty at a rate of 5%-7% of the market value of the assets; import and export goods are subject to customs duties, etc.
2. Cryptocurrency Tax System in India
India currently has a huge cryptocurrency market worth 6.6 billion US dollars, and according to a report by Nasscom, its market size is expected to grow to 15.6 billion US dollars by 2030, with great potential. Cryptocurrencies are considered as a type of virtual digital asset in India, and virtual digital assets have always been in a gray area in India. After multiple declarations by the Indian government, various aspects related to taxes on virtual digital assets have gradually become clear. However, India has not yet clearly defined specific tax guidelines for cryptocurrencies, which has led to some uncertainty and room for interpretation, as well as confusion in tax reporting and calculation.
1. Definition of Virtual Digital Assets
Virtual Digital Assets (VDAs) refer to any code or token generated through encryption and serving as a store of value. Virtual digital assets include cryptocurrencies and non-fungible tokens (NFTs), but do not include gift cards, reward points, membership cards, website or platform subscriptions, etc.
2. Taxation of Virtual Digital Assets
As of now, India has not yet enacted laws regarding taxation of virtual digital assets. However, according to the draft of the Indian Cryptocurrency Regulation Bill proposed in 2021, VDAs will be subject to taxation. According to the draft, gains from cryptocurrencies may be classified as “other income” or “capital gains,” depending on the nature of the transactions and the holding period. Under the revised tax rules of the new Indian Finance Act, regardless of the tax rate at which an individual’s income falls, holding and transferring digital assets are subject to a 30% cryptocurrency tax based on the highest tax rate for personal income tax. In addition, each cryptocurrency is treated as a separate asset class, and traders cannot offset the trading losses of one cryptocurrency against the gains from another cryptocurrency to obtain tax relief. Furthermore, the government also imposes a 1% tax deducted at source (TDS) on the portion of transaction value exceeding INR 10,000 in order to prevent tax evasion.
When calculating cryptocurrency gains, only acquisition costs are allowed to be deducted from the selling price. Any other expenses such as sales expenses, mining costs, and infrastructure costs are not deductible. If a gift is received in the form of cryptocurrency, such gifts received may fall within the scope of gift tax as provided in Section 56 of the Income Tax Act.
3. Current Status and Trends of Cryptocurrency Regulation in India
The rise of cryptocurrencies in India began with the popularity of Bitcoin. In the early stages, the Indian government took a wait-and-see attitude towards cryptocurrencies and did not have a specific regulatory framework. From 2013 to 2018, the values of many cryptocurrencies rose significantly, and initial coin offerings (ICOs) also grew rapidly. This caught the attention of Indian regulatory agencies.
In 2017, India established an interdepartmental committee to study the pros and cons of banning and regulating cryptocurrencies. In the draft of the “Cryptocurrency and Regulation of Official Digital Currency Bill” in 2018, the committee recommended regulating private cryptocurrencies and considered banning cryptocurrencies as an extreme measure, suggesting the use of regulatory tools to regulate cryptocurrency exchanges and allow private buying and selling of virtual currencies.
In 2018, the Reserve Bank of India (RBI) issued a notice prohibiting regulated entities from providing services to individuals or businesses involved in cryptocurrencies. This led to a certain degree of disruption in India’s cryptocurrency ecosystem.
However, in 2020, the Supreme Court of India ruled that the RBI notice was unconstitutional and declared it invalid. This decision was seen as a historic milestone, as it lifted the ban on cryptocurrencies in India and provided a more favorable environment for cryptocurrency transactions and investments. With the Supreme Court’s ruling, there are also indications that the Indian government is exploring the formulation of regulatory provisions to regulate the use and trading of cryptocurrencies. In early 2021, the Indian government proposed the draft “Cryptocurrency and Official Digital Currency Regulation Bill” aimed at providing regulatory and compliance frameworks for cryptocurrencies.
In addition, to combat money laundering activities, India enacted the “Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act” in 2015 and the “Benami Transactions (Prohibition) Amendment Act” in 2016. Indian financial institutions and exchanges are obligated to report any suspicious cross-border transactions to relevant authorities. Illegitimate income obtained in India (e.g., gambling) is still subject to individual income tax, which may also apply to cryptocurrencies.
Due to the significant amount of investments already concentrated in the cryptocurrency field, it is unlikely that India will completely ban cryptocurrency trading in the future, as it would result in a loss of substantial opportunities. The Indian government has recognized the potential of cryptocurrency technology and is exploring its application in various sectors of the digital economy. However, the government also expresses concerns about the potential risks and challenges of cryptocurrencies, particularly in terms of money laundering, illegal activities, consumer protection, investor risks, and financial stability. The Indian government is seeking to establish an appropriate regulatory framework. In the future, while promoting innovation and safeguarding the interests of market participants, reducing regulatory risks, simplifying the calculation and collection of interests or taxes, will be the development trend of India’s cryptocurrency policy.
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