Debashis Acharya
Finance Minister Nirmala Sitharaman delivered her shortest ever Budget speech using a digital tablet Feb 1, 2022. The word ‘digital’ appears 35 times in this Budget speech with several proposals to promote India’s digital economy and fintech. But the retail investors in cryptocurrencies/assets must have been disappointed to some extent. The speech doesn’t use the word ‘crypto’ but proposes a scheme of taxation in respect of the digital virtual assets. The details of these assets are given in Chapter III of the Finance Bill. The income from transfer of any virtual digital assets meaning cryptocurrencies or similar virtual currencies/assets shall be taxed at the rate of 30 per cent. In an opinion piece dated August 29, 2021, in this newspaper, I did discuss such a possible move by the government. What we see in the Budget could be the result of a year-long lobbying by the crypto exchanges or an induced policy move. But the scheme is very stringent since, “No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income.” The transaction details will also be captured via TDS on payment made at the rate of 1 per cent above a threshold. The gift of such assets shall also be taxed.
The Central Bank Digital Currency, India’s digital rupee is also going to see the light of day soon. The discussion on crypto by the government and the Reserve Bank of India (RBI) has always gone with possible introduction of CBDC. But the purpose of holding cryptocurrencies and CBDC for a retail agent or an individual is very different. The former is held as a risky asset to reap high returns whereas the latter is legal tender in digital form. Thus, CBDC is supposed to replace cash as a medium of exchange. A few years ago, the Institute for Business in the Global Context estimated the cost of cash dependency in India at `21,000 crore on account of currency operations including cost of printing new currency, cost of currency chest, and cost of maintaining supply to ATMs. The Ratan P Watal committee report of the Govt of India in 2016 set the objectives and rationale towards a less cash economy. Since then, both the supply side and demand side factors have resulted in a digital payment to GDP ratio of about 15% in the last 10 years, indicating an increase of about 9%. Coming to cryptocurrencies, at present we see crypto literacy taking place through peer-to-peer learning, advertisements in different online platforms including Swiggy. The other day, I saw an Uber taxi carrying CoinDCX advertisement with the celebrity Ayushman Khurana. In the past, crypto exchanges have gone out of the way to lure customers and attract investments.
How is this Budget proposal on crypto tax and CBDC going to change the behaviour of the retail investor or the common man exposed to such advertisement-based literacy campaigns? Let’s look at India’s digital payments landscape. The Digital Payments Index constructed by the RBI captures the extent of digitisation of payments across the country. This index for March 2021 stands at 270.59 as against 207.84 for March 2020. There has been rapid adoption and deepening of digital payments across the country in recent years. The huge growth of UPI payments also speaks of the accelerated adoption of digital payments in this country. Almost every pushcart vendor has his QR code hanging in the cart, happily accepting payment through UPI. In fact, most of them prefer UPI payments for a variety of reasons. As of December 2021, UPI has been a great success with 282 live banks, transaction volume of 4566 million and transaction value of `8,26,848 crore. In view of this understanding CBDC may not be difficult for the public. The adoption of CBDC once introduced will depend on its relative merits compared to the digital payment modes people are using today, say UPI. In general, the issues of transaction cost, safety, security, vulnerability to fraudulent activities, and anonymity will decide the uptake of CBDC. Moreover, the potential users need to have the details. T Rabi Sankar, Dy. Governor, RBI says in one of his recent speeches: “RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption.” We will have to wait for details on CBDC such as the underlying technology of CBDC, distribution mechanism i.e., directly by RBI or through commercial banks, wholesale, or retail, and most importantly the degree of anonymity.
Why should people hold crypto in days to come in view of the excessive volatility in its prices/returns and the 30% tax imposed now? The government has sent a strong message saying that currency issuance will always remain a sovereign function. The use of the word “digital virtual asset” signifies that cryptocurrency are assets and investment in them is best left to the wisdom of investors. It’s up to the investors to decide their exposure to these risky assets in their investment portfolio. Left to an individual investor the decision will depend on returns, risk, and the tax imposed. The exchanges may celebrate perceiving the tax scheme as legalisation of crypto. But the future is uncertain since a lot depends on how people respond to the crypto tax in evolving market conditions. We don’t have any detailed regulation in place except the amended clause, 47A, in Section-2 of the Income Tax Act. Given the high volatility in prices of these currencies, the concern on financial stability remains. The provision of TDS will build the much-needed database on crypto to decide future course of policy action. Finally, increased use of such private virtual digital assets reminds me of Benjamin Friedman’s prediction. If individuals, banks, and financial institutions start lending and borrowing in cryptos, the efficacy of RBI’s monetary policy will be in danger. And yes, for the common man, I would still say, “Be aware of cryptos.”
The writer is Professor, School of Economics, University of Hyderabad. Views are personal.