While cryptocurrencies continue to surge and confound expectations, as they have done for years now, there are various countries around the world which are still extremely sceptical about this concept and its prospects. India is one of them, despite the enthusiasm of its people to invest in crypto markets. That was only made possible last year, in March 2020, after the country’s Supreme Court struck down restrictions on crypto ownership and trading, which had been imposed by the central bank, the Reserve Bank of India, back in 2018. That is just one example which shows the Indian authorities reluctance to get involved in crypto or to allow it to thrive in India. Thus, 2021 will be a very important year for cryptocurrencies in the country, with several regulations and laws being planned which could either help launch cryptocurrency adoption in India, or prove to be a huge barrier for people to enter this space.
It is no surprise that the Indian public has been so receptive towards cryptocurrencies, given their general curiosity towards trends in global financial markets, as well as a growing class of people who have the wealth to afford crypto investments. This interest has also been tied with the way in which cryptocurrencies have been associated with other pursuits, most notably gambling. Gambling remains an extremely popular activity in India, despite it being largely illegal, and thus immediately there is a lot in common there with cryptocurrency investments as well. There have been a lot of sites offering bitcoin casino games in India which have become popular recently, as they offer users the chance to play their favourite casino games online while also being able to place bets and withdraw winnings in the form of cryptocurrencies. This has been one of the factors contributing to the popularity of cryptocurrencies in India.
Even though cryptocurrency investment continues to grow, there is still no effective regulation which covers this space in India. There are various new innovations in the market, including decentralized finance (DeFi) which runs largely on the Ethereum blockchain, among others, and the use of smart contracts not just in financial circles and to verify transactions, but in many other sectors and industries for a variety of uses. However, the response of the Indian government has been to try and gain as much revenue from it, with the Central Economic Intelligence Bureau proposing an 18% Goods and Service Tax (GST) on crypto transactions. Their report, in conjunction with the Central Board of Indirect Taxes and Customs, states that this could generate Rs 7,200 crore, or around $1 billion, in revenue for the central government. However, this has served to create alarm in the Indian crypto community. The 18% slab is the highest in India’s GST system, and imposing such a high tax will lead to a number of traders to move to foreign platforms, or even underground, which will deprive the government of revenue, but is also not safe for the traders either. The Indian crypto market is currently estimated to be worth over Rs 40,000 crore ($5.47 billion) per annum, and so heavy taxation is not the answer to the regulatory vacuum that exists currently.
Taxation will bring benefits, in that the crypto market will get recognized as an official asset class, much like equities, debt, gold and so on, which could spur investment as well. However, there is still a long way to go before they get recognized as legal tender, which has only happened in Japan at the moment. It is important to also look at the tax rates on other financial assets. Gold, for example, only has a 3% GST rate, which is lower than standard tax rates, and most industry experts have called for crypto to be treated in a similar manner if the Indian government wants to encourage crypto trading, and not drive away investment.