The Indian cryptocurrency industry is going through a period of uncertainty, reflected not only in the lack of a comprehensive regulatory framework at the national level, but also in the vacillation of regulators in their attitude towards cryptocurrencies.
Written by: TaxDAO
1. Introduction
The Republic of India, the largest country in the South Asian subcontinent, has a land area of about 2.98 million square kilometers, ranking seventh in the world, and a population of 1.44 billion. Since 2021, India has become the fastest growing large economy in the world, with an average economic growth rate of 6.5%, twice the global average. According to estimates by the International Monetary Fund (IMF), in 2023, India's GDP will reach 3.53 trillion US dollars, surpassing the United Kingdom to become the world's fifth largest economy. In April 2024, the IMF raised its economic growth forecast for India from 2024 to 2025 from 6.5% to 6.8%, due to strong domestic demand and an increase in the working-age population. In recent years, most of India's economic activities have been driven by investment, with annual investment accounting for 33.7% of GDP in 2023, up from 31.6% before the epidemic, mainly due to the Indian government's promotion of infrastructure investment, which offset the drag of bleak growth in private consumption, government consumption and slowing external demand. In addition, the attractiveness of the Indian market to investors has grown simultaneously. Morgan Stanley analysis believes that the Indian stock market has become the world's fourth largest stock market and is expected to become the world's third largest stock market by 2030. Multinational companies' confidence in India's investment prospects is at an all-time high. However, India also has obvious imbalances, with a large gap between total GDP and per capita GDP, a serious tilt in economic and industrial structures, and a huge disparity in national living standards between regions. From an overall level, India is already the world's fifth largest economy, but from a per capita level, it still hovers around 140th, far below China, Mexico, South Africa, etc.
2. Overview of India’s basic tax system
2.1 Indian Tax System
The Indian tax system is based on the provisions of the Indian Constitution. According to Article 265 of the Indian Constitution, "Taxes cannot be levied administratively without the authorization of Parliament." The power to collect taxes in India is mainly concentrated between the federal central government and the states. Local municipal governments are responsible for collecting a small number of taxes. There is a clear division of taxation between the central government and the states. The taxes collected by the central government (Central Taxes) include two categories: direct taxes and indirect taxes. Direct taxes mainly consist of corporate income tax, personal income tax and property tax, and indirect taxes mainly include goods and services tax, tariffs, etc. India's taxation is mainly managed by the Indian Revenue Service (IRS). Its subordinate Central Direct Tax Bureau manages direct tax-related matters such as income tax and property tax; the Central Board of Excise and Customs (CBEC) is responsible for managing India's customs and indirect taxes such as central excise tax and service tax. State governments mainly collect goods and services tax, stamp duty, state excise tax, entertainment and gambling tax, land income tax, etc. In areas not covered by the goods and services tax, such as petroleum products and liquor, original taxes such as value-added tax (sales tax in states that have not implemented value-added tax) continue to be levied. The taxes levied by local city governments mainly include property tax, market entry tax, and tax on the use of public facilities such as water supply and drainage.
Indian tax collection strictly follows the principle of tax legality. Since Indian law adopts the Anglo-American legal system (common law system/maritime law system), although Indian tax laws (statutes or written laws) are constantly increasing and improving, they are still subject to the interpretation of case law. Case law generally refers to legal principles or rules established in the judgments of high courts, which are binding or influential on subsequent tax case judgments.
2.2 Corporate income tax
In India, companies are subject to corporate income tax on their income. There is no separate capital gains tax in India and capital gains are included in the taxable income for corporate income tax purposes. The (Income Tax Act), 1961 provided for the minimum alternative tax, dividend tax and share repurchase distribution tax. The (Financial Act, 2020) abolished the dividend distribution tax and levied income tax on dividend income in the hands of shareholders instead. The tax year is from April 1 of the current year to March 31 of the following year.
A resident enterprise is one that is incorporated in India and has its place of effective management in India. The place of effective management (POEM) is the place where the key decision-making and business decisions for the overall operation of the enterprise are made.
The taxable income for income tax is divided into 4 categories: ① operating profit or gain; ② property income, including self-use, rental residential and commercial properties. If the property is used for the company's business operations, it does not fall into this category; ③ capital gains; ④ income from other sources, including lottery prizes, competition prizes and securities interest. Competitions include horse racing, cards and other gambling games. Tax-free income includes: ① earnings from shares of partnerships; ② long-term capital gains; ③ income from overseas services; ④ government bond income; ⑤ relief fund income.
The basic corporate income tax rate for domestic enterprises is 30%. In addition, enterprises should pay corresponding additional taxes and health education surcharges based on the amount of corporate income tax. Some enterprises are subject to specific preferential tax rates: (1) Small and medium-sized enterprises with a total turnover or total income not exceeding RS 4 billion are subject to a corporate income tax rate of 25% without tax exemptions or incentives; (2) Production, manufacturing, R&D enterprises and supporting enterprises that complete registration on or after March 1, 2016 are subject to a corporate income tax rate of 15% without tax exemptions or incentives, and pay a 10% additional tax; (3) Domestic R&D (according to the Patents Act, 1970, at least 75% of the R&D expenses are incurred in India) and royalties obtained from registered patents are subject to a corporate income tax rate of 10%; (4) Domestic limited liability partnerships are subject to a corporate income tax rate of 30%, which is consistent with unincorporated partnerships; (5) Foreign enterprises and limited liability partnerships established overseas are subject to a corporate income tax rate of 40%, etc.
Non-resident companies and their branches are generally subject to a corporate income tax rate of 40%, plus a surcharge of 2% (if net income exceeds RS 10 million but does not exceed RS 100 million) or 5% (if net income exceeds RS 100 million), and a health education surcharge of 4% on the tax payable.
India offers many income tax incentives, including full or partial tax exemptions, reduced tax rates, tax refunds, accelerated depreciation or special deductions. Tax incentives apply to a wide range of industries, including export-oriented enterprises, industrial operations in free trade zones and science parks, infrastructure development, hotels, tourism, enterprises in development zones, research companies, mineral oil production, cold chain facilities, shipping and air transportation, tea/coffee/rubber industries, news agencies and waste disposal businesses. For example, newly established companies that manufacture products or provide services in special economic zones are eligible for a number of tax incentives, including 100% tax exemption on profits and gains in the first 5 years, and 50% tax exemption on profits and gains in the next 5 years; if certain conditions are met, an additional 50% tax exemption is available for the next 5 years; approved developers can obtain longer tax exemptions.
2.3 Personal income tax
Indian residents are taxed on their worldwide income. A person who is resident in India but not ordinarily resident is taxed only on income derived in India, income deemed to arise or be derived in India, income received in India, or income received outside India but derived from a company controlled by an Indian person or incorporated in India.
A non-resident Indian is taxable only on income derived in India and income received, accrued or derived in India. A non-resident Indian may also be taxed on income accrued or derived in India through a business relationship, income derived from any asset or source of income in India, or income derived from the alienation of assets situated in India (including shares in a company incorporated in India).
In India, income is taxed on a graduated basis. The income tax of foreign nationals in India is determined based on their tax residency status. Individual income is taxed at progressive rates based on the individual's residency status and income level in India as stipulated in the Income Tax Act, 1961. Non-employment income is taxed at variable rates based on the type of income. Resident individual income tax adopts a classified comprehensive tax system with progressive tax rates. Calculation method: The taxpayer adds up all types of income (salary income, real estate income, business income, capital gains and other income) and deducts tax benefits, tax-free income, pre-tax deductions (insurance expenses, medical expenses, education expenses, charitable donations, etc.) and losses allowed in previous years to obtain the taxable income. The tax amount after applying the excess progressive tax rate to the taxable income is the tax payable. On this basis, the additional tax, education surcharge and secondary and higher education surcharge are calculated to obtain the total tax payable for income tax. Non-resident taxpayers are subject to withholding tax at the same rate as resident taxpayers, and if their annual net income exceeds RS 10 million, they are also subject to a 15% surcharge and a 4% health and education surcharge.
Personal income tax rate
Subject to certain requirements, the following benefits are eligible for tax benefits: (1) company-provided housing; (2) accommodation provided to employees working in mining areas or onshore oil exploration areas, project construction sites, dam sites, power plants or offshore. The following items contributed by the employer, up to the prescribed limit, do not need to be included in the employee's taxable remuneration: (1) reimbursement of medical expenses; (2) contributions to Indian retirement benefit funds, including provident funds, pension and old-age pension funds. Certain allowances (including housing allowances and holiday travel allowances) may be exempt from tax or included in taxable income at a lower value, subject to certain conditions. Additional allowances paid at the beginning or end of employment are included in taxable remuneration. Life insurance premiums, social security contributions and tuition and fees for full-time education at a university, college or other educational institution are deductible from income, up to a maximum of RS 1.5 lakh.
2.4 Goods and Services Tax
The predecessor of India's Goods and Services Tax was sales tax, which was levied on domestic and interstate sales and import and export trade according to the Central Sales Tax Act of 1956. In 2005, value-added tax replaced sales tax. Since July 1, 2017, value-added tax has been replaced by goods and services tax (GST). After India implemented the goods and services tax (GST) reform, goods and services tax includes value-added tax (VAT), central excise tax, vehicle tax, goods and passenger tax, electricity tax, entertainment tax and other taxes. Goods and services tax is an indirect tax and a transaction-based tax system. At present, there are some products that are still not within the scope of goods and services tax, such as gasoline, diesel, aviation turbine fuel (ATF), natural gas, alcohol for human consumption and crude oil. Goods and services tax is a comprehensive tax levied on the supply of all goods and services, similar to value-added tax.
At present, there are four basic tax rates for goods and services tax, namely 5%, 12%, 18% and 28%. Each tax rate is the combined tax rate of CGST and SGST, that is, 50% each. In addition, there are two tax rates of 0.25% and 3% applicable to diamonds, unprocessed gemstones, and small quantities of goods such as gold and silver. Therefore, if the zero tax rate on exports is not included, India's GST actually has 6 tax rates. In addition, in addition to the above-mentioned GST rates, the GST law also imposes additional taxes on the sale of certain goods (such as cigarettes, tobacco, aerated water, gasoline and motor vehicles), ranging from 1% to 204%. The tax rate for most goods is below 18%, and certain luxury goods and harmful goods are subject to a 28% tax rate, and additional taxes are also levied.
3. India’s crypto asset tax regime
3.1 Overview of Crypto Taxation in India
The Indian Income Tax Department (ITD) introduced Section 2(47A) in the (Income Tax Act) to define Virtual Digital Assets (VDA). This definition is quite detailed and covers all types of crypto assets, including cryptocurrencies, NFTs, tokens, etc.
In the 2022 Budget, the Finance Minister introduced Section 115BBH, which imposes a tax rate of 30% (plus applicable surcharge and 4% surcharge) on profits earned from trading cryptocurrencies from April 1, 2022. This tax rate is in line with the highest income tax bracket in India (excluding surcharge and surcharge) and is applicable to private investors, commercial traders, and anyone who transfers crypto assets during a particular financial year. Furthermore, the 30% tax rate will apply to all income, regardless of the nature of the income, which means there will be no distinction between short-term and long-term gains, whether it is investment income or business income.
In addition to the 30% tax rate, another clause, Section 194S, also stipulates that from July 1, 2022, if crypto transactions exceed RS50,000 (or RS10,000 in some cases) in a financial year, a 1% tax deducted at source (TDS) will be levied on the transfer of crypto assets to ensure that all crypto transactions are tracked. Tax-exempt behaviors include: holding cryptocurrencies (HODLing); transferring cryptocurrencies between one's own wallets; receiving cryptocurrencies worth less than RS50,000; receiving cryptocurrencies as gifts of any amount from immediate family members.
Indian investors trading cryptocurrencies/NFTs need to declare their income as capital gains (if the assets are held as investments) or as business income (if the assets are used for trading), depending on the asset holdings. From fiscal year 2022-2023 and beyond, a new schedule specifically for reporting cryptocurrency/NFT gains has been added to the income tax return, called the Schedule - Virtual Digital Assets. This schedule continues to apply to the returns for fiscal year 2023-2024.
3.2 Specific application of crypto tax
A 30% crypto tax is payable on the following transactions: selling cryptocurrencies for Indian RS or other fiat currencies; trading cryptocurrencies for cryptocurrencies, including stablecoins; using cryptocurrencies to pay for goods and services. However, the 30% tax rate is not always applicable to crypto assets, and sometimes the income tax department treats them as other income, in which case tax will be paid according to the personal income tax bracket (see 2.3), including: receiving crypto gifts (if you are the recipient); mining cryptocurrencies; paying wages in cryptocurrencies; staking rewards; airdrops. If you subsequently sell, trade, or use these cryptocurrencies, you may need to pay a 30% tax on the profits you make.
ITD has not yet issued specific guidance on DeFi transactions, and it is necessary to refer to the existing provisions of the income tax law. The following DeFi transactions may be taxed at personal income tax rates when received: new tokens, governance tokens or reward tokens obtained through liquidity mining; referral rewards; income earned from games; income from browsing earning platforms such as Permission.io or Brave. Even if the tax has been paid at the time of receipt, if these tokens are sold, exchanged or used later, a 30% tax will be required on the profit.
3.3 Tax Deducted at Source (TDS)
In India, investors have to pay a 1% tax deducted at source (TDS) on the transfer of crypto assets. TDS is a tax levied at source, and the main reason for introducing 1% TDS is to capture transaction details and track the investment of Indian investors in crypto assets. There are a few things to note about TDS: TDS is applicable to transactions after July 1, 2022; when trading on Indian exchanges, TDS will be deducted by the exchange and paid to the government; when trading through P2P platforms or international exchanges, the buyer is responsible for deducting TDS; in transactions between cryptocurrencies, TDS will be levied at 1% on both the buyer and the seller.
It is important to note that if the transaction amount is paid by a “specified person” and the total value of their crypto trading activities does not exceed RS50,000 in a financial year, no TDS will be deducted. A specified person refers to an individual or HUF (Joint Indian Family). If the trader has no business income in the previous financial year, or his sales/gross income/business income does not exceed RS100 million, or his sales/gross income/professional income does not exceed RS500,000, then the TDS limit will be reduced from RS50,000 to RS10,000.
If trading is done on an Indian exchange, usually the TDS requirement will be done directly by the exchange and hence no action is required at the time of tax return. But in P2P and international exchange transactions, the responsibility to pay and declare TDS as a specific person is as follows: In P2P transactions and international exchange transactions, TDS needs to be submitted through Form 26QE within 30 days after the end of the month in which the deduction is made. Currently, this form is not available on the income tax portal, so investors need to wait for clear instructions from ITD on how to deposit TDS. All non-specific persons need to obtain a TAN number, submit Form 26Q on a quarterly basis, and pay TDS tax before the 7th of the following month. In addition, the total tax payable can be reduced by claiming TDS credit at the time of tax return.
3.4 Tax regulations related to losses and losses
Under Section 115BBH, losses on cryptocurrencies are prohibited from being deducted against crypto gains or any other gain or income. Crypto investors in India are also not allowed to claim crypto-related expenses unless it is the acquisition cost/purchase price of the asset.
The Indian Income Tax Department (ITD) has not given clear guidance on lost or stolen cryptocurrencies, but based on Indian court decisions on loss or theft of other assets, cryptocurrency losses due to hacking, fraud, or theft are generally not taxable. However, given the ITD’s strict rules on cryptocurrency loss deductions, it will be difficult for investors to claim loss deductions for lost or stolen crypto assets.
4. Overview of India’s crypto asset regulatory regime
The Indian cryptocurrency industry is going through a period of uncertainty, reflected not only in the lack of a comprehensive regulatory framework at the national level, but also in the regulators’ wavering attitude towards cryptocurrencies. The Indian Crypto Bill is seen as a potential game-changer, which is expected to pave the way for digital currencies issued by the Reserve Bank of India (RBI), hinting at an advancement that could put India at the forefront of the central bank digital currency (CBDC) revolution. However, the reality is much more complicated. The bill has been in the works for many years and has undergone multiple amendments and delays. Its content remains unclear and there are contradictions about its stance on private cryptocurrencies.
The bill’s journey reflects the global struggle to effectively regulate digital assets. While governments see the potential of blockchain technology and digital currencies, concerns about financial stability, investor protection, and preventing illicit activity remain significant. The situation was further complicated by a recent statement from India’s Finance Ministry, which said there were no legislative proposals to regulate digital asset trading, a statement that came as a surprise to many given that discussions on the (Cryptocurrency Bill) are still ongoing. This apparent contradiction points to differing views on cryptocurrency regulation within the Indian government, while also highlighting the challenges policymakers face in keeping up with the rapidly evolving cryptocurrency space.
Given the challenges of top-down regulation, there is growing support within the Indian cryptocurrency industry for self-regulation. This approach could find a middle ground between unfettered market freedom and strict government control. Self-regulation in the cryptocurrency space could involve industry-led initiatives to establish best practices, implement strong KYC and anti-money laundering (AML) procedures, and put in place consumer protection mechanisms. By proactively addressing regulatory issues, the crypto industry can demonstrate its commitment to responsible growth and potentially ease some of the government’s concerns.
In fact, some Indian cryptocurrency exchanges have already taken steps in this direction. For example, WazirX, a large cryptocurrency exchange in India, has implemented strict KYC procedures and works with law enforcement agencies to prevent illegal activities. However, self-regulation may not adequately address all regulatory issues and may lead to conflicts of interest. Despite these challenges, self-regulation may still play a key role in the short to medium term, especially given the current regulatory uncertainty.
While India may lack a comprehensive regulatory framework for cryptocurrencies, it has taken steps to impose some form of oversight on the industry, primarily in the form of taxation and anti-money laundering measures. On the tax front, as mentioned above, this includes a 30% tax on profits from cryptocurrency trading and the implementation of tax withholding at source (TDS). On the anti-money laundering front, cryptocurrency exchanges operating in India must comply with the Prevention of Money Laundering Act (PMLA). These measures represent a pragmatic approach to cryptocurrency regulation, and by focusing on taxation and AML compliance, the government has found a way to exert some control over the cryptocurrency industry without explicitly legalizing or banning cryptocurrencies.
In 2024, Binance, one of the world’s largest cryptocurrency exchanges, announced its successful registration as a reporting entity in India, marking an important turning point in India’s cryptocurrency regulation. Binance complies with India’s Anti-Money Laundering (AML) standards, aligned with the government’s focus on preventing illegal activities in the cryptocurrency space. Therefore, Binance’s successful registration may serve as a catalyst for India to develop more comprehensive cryptocurrency regulation, making it possible for global cryptocurrency players to conduct business within India’s regulatory framework and potentially encouraging the government to develop more detailed guidelines for the industry.
5. Summary and Outlook of India’s Crypto Asset Taxation and Regulatory System
Although India has not yet established a comprehensive regulatory framework for crypto assets, it has initially managed them through taxation. In other regulatory aspects, despite the lack of specific legislation, some exchanges have taken self-regulatory measures such as implementing strict KYC and AML procedures.
Looking ahead, as the global crypto market develops, the Indian government may introduce more comprehensive regulatory policies. The successful registration of international players such as Binance as an Indian reporting entity shows its willingness to adapt to the local regulatory environment, which may prompt the government to formulate more detailed guidelines to achieve a balance between financial security and innovative development. At the same time, tax compliance and anti-money laundering will be key factors in the continued healthy development of India's crypto asset ecosystem. For all countries, the development of cryptocurrency is a process of constantly adapting to technological development, balancing innovation and risks, and gradually aligning with international standards, striving to establish a more stable and mature market environment and promote the healthy development of the cryptocurrency industry.
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