source: Catax / LinkedIn
Tax and regulation talk is a big deal in the Indian crypto market. The central government is expected to unveil the interim budget on February 1st, and cryptocurrency traders and exchanges are expecting relief from the 30% tax and 1% TDS (Tax Deducted at Source) on cryptocurrency. Nonetheless, it appears less likely that their wish will be fulfilled.
In a conversation with Gaurav Mehta, the founder of Catax, India’s first crypto tax software, we explore where India is heading with crypto tax laws and regulations.
India’s First Crypto Tax Software
Eight years before there were any official crypto tax laws in India, Gaurav had the idea to run a crypto tax software back in 2014 and had already begun to pitch the idea to investors. However, Catax’s crypto tax solution did not begin to take shape until 2022.
As a forensic expert in blockchain cases for various law enforcement agencies, Gaurav trained IRS officers from 2021 to 2023 as a guest lecturer at the National Academy of Direct Taxes. According to Gaurav, who spoke with Cryptonews, Catax, which was initially founded to provide crypto taxation solutions to governments and businesses, hopes to assist one million retail customers with free crypto tax solutions by 2024–2025.
Government is Building Competency in Catching Crypto Tax Evaders
Talking about current crypto taxations in India, Gaurav said:
“Up until 2023, the anonymity of the blockchain primarily benefited individuals. However, starting in 2024, the dynamics shift in favor of organizations, compliance, and all stakeholders. This shift occurs because the recent advancements have enabled the capacity to interpret, and track the blockchain effectively. As a result, taxation is poised to become a significant concern for everyone in the upcoming years.”
“The government is now building competency in this domain that will ultimately translate into identifying the people who are evading taxes,” he added.
The Battle of 1% TDS on Crypto Transactions
Gaurav says that 1% TDS on cryptocurrency taxes makes sense since it helps clean up markets from scams like pump and dump schemes. “The primary goal of the 1% TDS is to eliminate market speculation, which has been destabilizing the public for a long time. It guarantees that people are only incentivized to engage in essential and productive trade,” he stated.
But in the five months prior to India enacting a 1% TDS on cryptocurrency transactions in July 2022, three to five million users fled to foreign exchanges. The Indian government lost out on about $420 million in taxes as a result of this. All offshore cryptocurrency exchanges are currently blocked in India.
Neeraj Khandelwal, co-founder of CoinDCX, the top cryptocurrency exchange in India, previously stated in an interview with Cryptonews that 1% TDS on cryptocurrency transactions is a “death blow” to the sector.
Future of Crypto Regulations in India
It is unlikely that crypto regulations will be similar to those in developed nations like the USA or the UK, according to Gaurav, given that India has a protectionist economy, meaning the government closely monitors the funds flowing outside of the country.
Nonetheless, there are currently over 15 million investors in India who are passionate about cryptocurrencies and are pushing the government to enact laws. Gaurav went on to say that regulations that distinguish between owning and trading cryptocurrency might exist given India’s current economic situation. He added:
“We may have something where people would be able to create a Demat-like account on the crypto exchanges and would be able to buy and sell their crypto. But to transfer the crypto from India to somewhere else that clearance would be done by National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL) like entities.”
RBI Governor Remains Critical of Crypto
The governor of the Reserve Bank of India, Shaktikanta Das, reiterated the negative view of cryptocurrencies today at the World Economic Forum in Davos, saying, “A country like India should be very careful because cryptocurrency is highly speculative.”
He added:
“Cryptocurrencies have huge risk, particularly for emerging market economies because it can impact your financial stability, currency stability, and monetary system.There is no underlying value. It is not a currency, but it has the potential to become a currency in which event it can occupy the part of the payments system. It can impact your banking system and therefore it has very much risk involved in it.”
During the G20 meeting in India last year, one of the main topics was cryptocurrency regulations. The Indian government approved a synthesis paper that suggested an IMF and FSB and suggested uniform regulations for all 20 members of the G-20. India’s cryptocurrency community is still waiting on official regulations.