See: The problems with cryptocurrency taxation and why it needs a makeover

“Virtual digital assets have gained popularity lately and the trading volumes of these digital assets have increased significantly. In addition, a market is emerging where the payment for the transfer of a virtual digital asset can be made via another of these assets”, specifies the 2022 finance bill. Thus, the tax regime that will be effective from tomorrow for Virtual Digital Assets (VDA) was proposed in this year’s Union budget. In itself, it is a progressive movement. However, the words “information”, “code” and “number” in the definition, as well as the inclusion of elements not generated by cryptographic means, make the definition extremely broad.

The risk associated with a broad definition is the high probability of extending its scope. For example, the reach of VDAs may begin to extend to unintended items, such as credit and debit card rewards points, airline miles, digital vouchers, and securities held in dematerialized form. This may create tax uncertainty for situations properly handled under applicable laws.

Additionally, the Indian government has sought to notify Non-Fungible Tokens (NFTs) as taxable VDAs. It is unclear how double taxation of the same transaction would be avoided when the NFT is simply a digital representation of ownership of an underlying physical asset, such as a painting. Would the NFT transfer and sale of the painting be taxed, or just one of these transactions? In the latter case, what tax regime would apply? This may defeat the legislative intent and instead impose a tax on items for which existing tax laws already apply. A modified VDA definition, specifying transactions inherently related to blockchain or digital ledger technology, may help clarify matters.

The 1% TDS meant to track crypto trades is already seeing trades being moved out of the market or out of India. Over time, this would remove liquidity from the system, causing traders to have to wait a long time to claim tax refunds, leading to lower trading volumes during this period, leading to the Indian government collecting much lower taxes than expected.

Meanwhile, a flat tax rate of 30% not only impacts future digital businesses, but also marginalizes philanthropic contributions. While the tax rate treats crypto-related activities as gambling, they are said to have come to the rescue during the pandemic in the world, especially in India. Even in the ongoing war in Ukraine, quick relief funds have reportedly been largely raised through crypto donations.

For India to tap into the $1.1 trillion growth opportunity offered by the “decentralized and trust-based” model of Web 3.0 – a far cry from the “client-server, government-regulated” model – it is imperative that light regulations be put in place. instead of providing fertile ground for national innovation. The tax regime offered by the VDA is anything but.