By Karam Singh Grover Director- Public Policy, Aakhya India Pvt Ltd.
The Government of India is reported to have collected Rs. 157.9 crore (approx. US$19 million) in direct taxes by way of tax deducted at source (TDS) on virtual digital asset (VDA) transactions. VDAsare subject to a stringent taxation regime where 1% TDS is chargeable on every transaction exceeding Rs. 10,000. The tax regime was announced by the Finance Ministry in Union Budget 2022, which also included a 30% capital gains tax on sale of VDAs, effective from 1 April 2022. The 1% TDS on transactions came into effect from 1 July 2022.
India’s Minister of State for Finance, Mr. Pankaj Chaudhary, in response to an un-starred Parliamentary Question, has given his reply in the Rajya Sabha on 28 March 2023, where he mentioned the above amount as the total revenue from TDS up to 20 March 2022 for FY 2022-23. While TDS is liable to be refunded where the assessee’s total tax liability is zero or does not exceed the TDS amount paid, it provides the Government with oversight for monitoring VDA transactions – which is the primary objective of imposing the TDS in the first place. When analysed in context of assessments of Indian VDA exchanges, which reported a heavy downturn in VDA investments and trading following the imposition of these taxes, the figures would indicate that there is still a considerably large market for VDAs in India. Data from Statista suggests that there are over 150 million VDA users in India, with a rapidly increasing rate of adaptation that is poised to overtake the US and the UK by the end of this year.
One thing is clear: despite an overbearing taxation regime, Indians are still interested in investing in VDAs and establishing Web3 business solutions. However, a large chunk of Web3 businesses owned by Indians are registered outside India. According to a report by the National Association of Software and Service Companies (NASSCOM), 60% of Web3 startups, which were Indian-founded, are registered in more favourable environments like the UAE and Singapore. This prompts the question – is the TDS ‘windfall’ worth losing the first mover advantage in Web3?
The emerging tech space in India is surging at an unprecedented rate, reminiscent of the IT boom of the 1990s which catapulted India’s struggling economy in the early days of liberalisation, providing enormous economic growth and jobs for millions of Indians. The information technology sector today stands as the backbone of India’s service economy, giving employment to talented engineers who hail from the remotest districts of India. The country is poised to reap the same benefit as it had with the IT sector in the blockchain space.
What’s slightly different about the blockchain boom, is that in addition to the growing pool of talented Web3 developers who are fast being absorbed into growing enterprises and startups around the world, we are also seeing a rapid influx of Indian entrepreneurs in the Web3, VDA and blockchain ecosphere. While the VDA bear market situation of 2022 (or crypto “winter”, as it is popularly known) has somewhat slowed things, it has not dampened the enthusiasm of young Web3 and VDA entrepreneurs. The Ministry of Electronics and Information Technology (MeitY) is also reportedly working on creating its own national blockchain infrastructure – a project that began in June 2022 following an update to its blockchain strategy in 2021. The project is called ‘Unified Blockchain Framework for offering National Blockchain Service and creation of Ecosystem.’
The Government of India has been paying attention to developments in Web3 and blockchain technology, and is ascertaining use cases within the Government itself for adoption. MeitY MoS Rajeev Chandrasekhar has also indicated that Web3, distributed ledger technology and blockchain will be included in the framework for the forthcoming Digital India Act, which is intended to replace the Information Technology Act, 2000. This is a positive sign for the sector and a step in the right direction. However, there is no doubt that the tax regime is hampering its growth in India, forcing entrepreneurs to look to more favourable jurisdictions for investment and establishing businesses.
The TDS mandate, which was meant to provide a window for the Government to monitor transactions in the VDA ecosystem, is not having the desired effect. In fact, it is encouraging the migration of Indian Web3 entrepreneurs to countries with more favourable VDA policies. While the TDS collection on VDAs is an indicator of the enormous size of the VDA market in India, it still pales in comparison to the enormous revenue and employment generating potential of a burgeoning sector – and will likely be a key factor in preventing India’s benefiting from Web3 as a result. The question we ought to be asking ourselves is – how much more growth might we be seeing without it? The monitoring requirement could be managed even with a 0.1% TDS – which might better help the Government achieve its objective without stifling growth of the sector. It is the author’s humble opinion that the Government of India could do well without Rs. 158 Cr – an indicative figure and an infinitesimal loss in comparison to what it might gain in revenue generation and job creation by the growth and proliferation of VDA and Web3 businesses. Certainly, it has the opportunity to test the waters, and the time is ripe for doing so.