Author: TaxDAO

1. Introduction

The Republic of India, the largest country in the South Asian subcontinent, covers an area of approximately 2.98 million square kilometers, ranking 7th in the world, with a population of 1.44 billion. Since 2021, India has become the fastest-growing major economy in the world, maintaining an average economic growth rate of 6.5%, which is twice the global average. According to estimates from the International Monetary Fund (IMF), in 2023, India's GDP reached $3.53 trillion, surpassing the UK to become the fifth-largest economy globally. In April 2024, the IMF raised India's economic growth forecast for 2024-2025 from 6.5% to 6.8%, citing strong domestic demand and an increase in the working-age population. In recent years, much of India's economic activity has been driven by investment, with the annual investment-to-GDP ratio rising from 31.6% before the pandemic to 33.7% in 2023, primarily due to the Indian government's push for infrastructure investment, offsetting the sluggish growth in private consumption, government consumption, and external demand. Additionally, the attractiveness of the Indian market to investors has increased simultaneously. Morgan Stanley analysis suggests that the Indian stock market has become the fourth-largest stock market globally and is expected to become the third-largest by 2030, with multinational companies' confidence in India's investment prospects at an all-time high. However, India also faces significant imbalance issues, with a large disparity between total GDP and per capita GDP, a severely skewed economic and industrial structure, and vast differences in living standards between regions. Overall, while India is the fifth-largest economy in the world, it still hovers around 140th in per capita terms, far below countries like China, Mexico, and South Africa.

2. Overview of India's Basic Tax System

2.1 India's Tax System

India's tax system is established based on the provisions of the Indian Constitution. According to Article 265 of the Constitution, "No tax shall be levied or collected except by authority of law." The authority to levy taxes in India is primarily concentrated between the federal central government and the states, with local municipal governments responsible for a small number of tax types. The tax powers of the central and state governments are clearly delineated. The taxes levied by the central government (Central Taxes) include two main categories: direct taxes and indirect taxes. Direct taxes mainly consist of corporate income tax, personal income tax, and property tax, while indirect taxes primarily include the Goods and Services Tax (GST) and customs duties. India's taxation is mainly managed by the Indian Revenue Service (IRS), with the Central Board of Direct Taxes managing matters related to income tax, property tax, and other direct taxes; the Central Board of Excise and Customs (CBEC) is responsible for customs and central excise taxes, service taxes, and other indirect tax matters. State governments mainly levy GST, stamp duty, state excise duty, entertainment and gambling taxes, land revenue tax, and others. In areas not covered by GST, such as petroleum products and liquor, value-added tax (VAT) continues to be levied (sales tax in states that have not implemented VAT). Local municipal governments primarily collect property tax, market entry tax, and utility usage taxes for water supply, drainage, and other public facilities.

India's tax collection strictly adheres to the principle of legality in taxation. Since Indian law follows the common law system, although Indian tax law (statutory law or codified law) continues to grow and improve, it is still constrained by interpretations of case law. Case law generally refers to legal principles or rules established in judgments by higher courts, which are binding or influential in subsequent tax case judgments.

2.2 Corporate Income Tax

In India, corporations are required to pay corporate income tax on their earnings. India does not have a separate capital gains tax; capital gains are included in the taxable income for corporate income tax. The Income Tax Act of 1961 stipulates minimum alternate tax, dividend tax, and tax on buyback of shares. The Finance Act of 2020 abolished the dividend distribution tax, instead imposing income tax on dividend income in the hands of shareholders, with the tax year running from April 1 of the current year to March 31 of the following year.

Resident companies are defined as those incorporated in India and having their place of effective management located in India. The place of effective management (POEM) is where key decisions and business decisions for the overall operation of the company are made.

Taxable income for corporate income tax is divided into four categories: ① business profits or earnings; ② property income, including self-occupied, rented residential properties, and commercial properties, provided that the property is not used for the company's business operations; ③ capital gains; ④ income from other sources, including lottery winnings, contest prizes, and interest from securities. Exempt income includes: ① share profits from partnerships; ② long-term capital gains; ③ income from foreign services; ④ income from government bonds; ⑤ income from relief funds.

The basic corporate income tax rate for domestic companies is 30%. Additionally, companies are required to pay corresponding surcharges and health education cess based on the corporate income tax amount. Some companies are subject to specific preferential tax rates: (1) small and medium enterprises with total turnover or gross receipts not exceeding 4 billion INR are subject to a 25% corporate income tax rate without enjoying tax exemptions or incentives; (2) manufacturing, production, and research and development companies registered on or after March 1, 2016, and their ancillary companies are subject to a 15% corporate income tax rate without enjoying tax exemptions or incentives, and pay a 10% surcharge; (3) royalties from patents obtained through domestic research (where at least 75% of R&D expenses occur in India) are subject to a 10% corporate income tax rate; (4) domestic limited liability partnerships are subject to a 30% corporate income tax rate, consistent with unincorporated partnerships; (5) foreign companies and limited liability partnerships established abroad are subject to a 40% corporate income tax rate.

Non-resident companies and their branches typically face a 40% corporate income tax rate, with an additional 2% (if net income exceeds 10 million INR but does not exceed 100 million INR) or 5% (if net income exceeds 100 million INR) surcharge, and a 4% health education cess on the taxable amount.

India offers numerous corporate income tax incentives, including full or partial exemptions, reduced rates, refunds, accelerated depreciation, or special deductions. The industries eligible for tax incentives are quite broad, including export-oriented enterprises, industrial operations in free trade zones and technology parks, infrastructure construction, hotels, tourism, enterprises in development zones, research companies, mineral oil production, cold chain facilities, shipping and air transport, tea/coffee/rubber industries, news agencies, and waste management businesses. For example, newly established enterprises manufacturing products or providing services in special economic zones are eligible for multiple tax incentives, including 100% tax exemption on profits and earnings for the first five years, and a 50% tax exemption on profits and earnings for the next five years; if certain conditions are met, an additional 50% exemption may apply for the following five years; approved developers may receive longer tax exemption periods.

2.3 Personal Income Tax

Indian residents are required to pay tax on their income worldwide. For individuals residing in India but not classified as ordinary residents, they are only required to pay income tax on income earned in India, deemed to have arisen or been received in India, or received in India, or income that, although received outside India, comes from sources controlled by Indian residents or companies established in India.

Non-resident individuals are only required to pay tax on income earned in India and income received, arising, or deemed to have arisen in India. Non-residents may also be taxed on income arising or deemed to have arisen in India through business relationships, income from any assets or sources in India, or income from the transfer of assets located in India (including shares in companies established in India).

In India, income is taxed according to a progressive system. The income tax for foreign nationals in India is determined based on their tax residency status. According to the Income Tax Act of 1961, individuals' residency status and income levels in India determine the progressive tax rates applied to personal income. Non-employment income is taxed at variable rates based on the type of income. Resident individuals' income tax follows a classified comprehensive tax system with progressive rates. The calculation method involves summing various types of income (salary income, property income, business income, capital gains, and other income) and then deducting tax incentives, exempt income, pre-tax deductions (insurance premiums, medical expenses, educational expenses, charitable donations, etc.), and allowable carry-forward losses from previous years to arrive at taxable income. The tax amount applicable to taxable income after applying the excess progressive tax rates constitutes the tax payable. On this basis, additional taxes, education cess, and higher education cess are calculated to determine the total income tax payable. Non-resident taxpayers must pay withholding income tax at the same rates as resident taxpayers, and if their annual net income exceeds 10 million INR, they must also pay a 15% surcharge and a 4% health education cess.

Personal Income Tax Rates

Under specific requirements, the following benefits may enjoy tax incentives: (1) housing provided by the company; (2) accommodation provided for employees working in mining areas, onshore oil exploration areas, project construction sites, dam sites, power plants, or offshore work. The following items paid by employers, if not exceeding specified limits, do not need to be included in the employee's taxable compensation: (1) reimbursed medical expenses; (2) contributions to the Indian retirement benefit fund, including provident fund, gratuity, and pension fund. Some allowances (including housing allowance and vacation travel allowance) may be exempt from tax or included in taxable income at a lower value, but must meet specific conditions. Additional allowances paid at the start or end of employment must be included in taxable compensation. Premiums for life insurance, social security contributions, and tuition and fees for full-time education at universities, colleges, or other educational institutions may be deducted from income, up to a maximum of 150,000 INR.

2.4 Goods and Services Tax

India's Goods and Services Tax (GST) evolved from the sales tax, which was levied on intra-state, inter-state sales, and import/export trade under the Central Sales Tax Act of 1956. In 2005, VAT replaced sales tax. Since July 1, 2017, VAT has been replaced by GST. After the implementation of GST reforms in India, GST includes VAT, central excise tax, vehicle tax, goods and passenger tax, electricity tax, entertainment tax, and other taxes. GST is an indirect tax based on transactions. Currently, some products remain outside the scope of GST, such as gasoline, diesel, aviation turbine fuel (ATF), natural gas, alcohol for human consumption, and crude oil. GST is a comprehensive tax levied on the supply of all goods and services, similar to VAT.

Currently, the basic tax rates for Goods and Services Tax (GST) in India are divided into four slabs: 5%, 12%, 18%, and 28%. Each slab represents the combined rate of CGST and SGST, with each levied at 50%. Additionally, there are two more slabs of 0.25% and 3% applicable to diamonds, uncut gemstones, and a few other goods like gold and silver. Therefore, excluding the zero rate applied to exports, India effectively has six GST slabs. Furthermore, in addition to the aforementioned GST rates, the GST law imposes additional taxes on certain goods (such as cigarettes, tobacco, aerated water, gasoline, and motor vehicles) with rates ranging from 1% to 204%. The majority of goods have tax rates below 18%, while specific luxury and harmful goods are subject to a 28% rate, along with additional taxes.

3. India's Taxation System for Crypto Assets

3.1 Overview of Crypto Tax in India

The Indian Income Tax Department (ITD) introduced Section 2(47A) in the Income Tax Act, defining Virtual Digital Assets (VDA) in a detailed manner that encompasses all types of crypto assets, including cryptocurrencies, NFTs, tokens, etc.

In the 2022 budget, the Finance Minister introduced Section 115BBH, which imposes a 30% tax rate (plus applicable surcharges and a 4% cess) on profits earned from trading cryptocurrencies starting from April 1, 2022. This tax rate aligns with the highest income tax bracket in India (excluding surcharges and cess) and applies to individual investors, commercial traders, and anyone transferring crypto assets within a specific financial year. Additionally, regardless of the nature of the income, the 30% rate applies to all income, meaning there is no distinction between investment income and business income, nor between short-term and long-term gains.

In addition to the 30% tax rate, another provision, Section 194S, stipulates that starting from July 1, 2022, a 1% Tax Deducted at Source (TDS) will be levied on the transfer of crypto assets if the total crypto transactions exceed ₹50,000 (or ₹10,000 in certain cases) within a financial year, ensuring that all crypto transactions are tracked. Exempt activities include: holding cryptocurrencies (HODLing); transferring cryptocurrencies between one's own wallets; receiving cryptocurrency gifts valued below ₹50,000; and receiving any amount of cryptocurrency gifts from close relatives.

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 holding situation. From the 2022-2023 financial year onwards, a new schedule specifically for reporting cryptocurrency/NFT gains, called the "Schedule - Virtual Digital Assets," has been added to the income tax return forms. This schedule continues to apply to the 2023-2024 financial year returns.

3.2 Specific Application of Crypto Tax

A 30% crypto tax is applicable when engaging in the following transactions: selling cryptocurrencies for Indian rupees or other fiat currencies; conducting crypto transactions using cryptocurrencies, including stablecoins; and using cryptocurrencies to pay for goods and services. However, not all crypto assets are subject to the 30% tax rate; sometimes the income tax department may classify them as other income, in which case taxes will be paid according to personal income tax brackets (see 2.3), including: receiving cryptocurrency gifts (as the recipient); mining cryptocurrencies; paying salaries in cryptocurrencies; staking rewards; and airdrops. Subsequent sales, trades, or uses of these cryptocurrencies may require paying 30% tax on the profits obtained.

The ITD has not yet issued specific guidance on DeFi transactions, and existing income tax law provisions must be referenced. The following DeFi transactions may be taxed at personal income tax rates upon receipt: obtaining new tokens, governance tokens, or reward tokens through liquidity mining; referral rewards; income earned from games; and income from browsing earn platforms like Permission.io or Brave. Even if taxes have already been paid upon receipt, selling, exchanging, or using these tokens later may still require paying 30% tax on the profits.

3.3 Tax Deducted at Source (TDS)

In India, investors must pay a 1% Tax Deducted at Source (TDS) on the transfer of crypto assets. TDS is a tax collected at the source, and the primary reason for introducing the 1% TDS is to capture transaction details and track Indian investors' investments in crypto assets. A few points to note about TDS: it applies 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 separately on both the buyer and seller at 1%.

It is important to note that if the transaction amount is paid by a "specified person" and their total value of crypto trading activities does not exceed ₹50,000 within a financial year, TDS does not need to be deducted. A specified person refers to an individual or HUF (Hindu Undivided Family). If a trader has no business income in the previous financial year, or their sales/total income/business income does not exceed ₹100 million, or their sales/total income/professional income does not exceed ₹500,000, the TDS threshold will be reduced from ₹50,000 to ₹10,000.

If trading occurs on an Indian exchange, the TDS requirements will typically be handled directly by the exchange, so no action is needed during tax filing. However, in P2P and international exchange transactions, the responsibility for paying and declaring TDS as a specified person is as follows: in P2P transactions and transactions on international exchanges, TDS must be submitted within 30 days after the month in which it was deducted using Form 26QE. Currently, this form is not available on the income tax portal, so investors must wait for the ITD to provide clear instructions on how to deposit TDS. All non-specified persons must obtain a TAN number, submit Form 26Q quarterly, and pay TDS tax by the 7th of the following month. Additionally, TDS can be claimed as a credit to reduce the total tax payable during tax filing.

3.4 Tax Regulations Related to Losses and Theft

According to Section 115BBH, losses from cryptocurrencies cannot be used to offset gains from cryptocurrencies or any other income or earnings. Indian crypto investors are also not allowed to claim expenses related to cryptocurrencies unless they pertain to the cost of acquiring the asset/purchase price.

The Indian Income Tax Department (ITD) has not provided clear guidance on lost or stolen cryptocurrencies, but based on Indian court rulings regarding losses or theft of other assets, losses from cryptocurrencies due to hacking, fraud, or theft generally do not incur tax liabilities. However, given the ITD's strict regulations on cryptocurrency loss deductions, investors find it challenging to claim deductions for losses resulting from lost or stolen crypto assets.

4. Overview of India's Regulatory Framework for Crypto Assets

The Indian cryptocurrency industry is currently experiencing a period of uncertainty, reflected not only in the lack of a comprehensive regulatory framework at the national level but also in the fluctuating attitudes of regulatory bodies towards cryptocurrencies. The Indian crypto bill is seen as a potential game-changer, expected to pave the way for the digital currency issued by the Reserve Bank of India (RBI), suggesting progress that could place India at the forefront of the central bank digital currency (CBDC) revolution. However, the reality is much more complex, as this bill has undergone years of deliberation, multiple revisions, and delays, with its content still unclear and conflicting positions regarding its stance on private cryptocurrencies.

The bill's journey reflects the global struggle for effective regulation of digital assets. While governments worldwide recognize the potential of blockchain technology and digital currencies, concerns about financial stability, investor protection, and preventing illegal activities remain significant. A recent statement from the Indian Ministry of Finance further complicates the situation, indicating that no legislative proposals for regulating digital asset trading have been introduced, which surprised many given that discussions about the "Cryptocurrency Bill" are still ongoing. This apparent contradiction highlights differing views within the Indian government regarding cryptocurrency regulation and underscores the challenges policymakers face in keeping pace with the rapidly evolving cryptocurrency landscape.

In light of top-down regulatory challenges, there is increasing support for self-regulation within the Indian cryptocurrency industry. This approach seeks to find a middle ground between unrestrained market freedom and strict government control, with self-regulation in the crypto space potentially involving industry-led initiatives to establish best practices, implement robust KYC and anti-money laundering (AML) procedures, and create consumer protection mechanisms. By proactively addressing regulatory issues, the crypto industry can demonstrate its commitment to responsible growth and potentially alleviate some government concerns.

In fact, some Indian cryptocurrency exchanges have already taken steps in this direction. For instance, a major Indian cryptocurrency exchange, WazirX, has implemented strict KYC procedures and collaborated with law enforcement to prevent illegal activities. However, self-regulation may not fully address all regulatory issues and could lead to conflicts of interest. Despite these challenges, self-regulation may play a crucial role in the short to medium term, especially considering the current regulatory uncertainties.

Although India may lack a comprehensive cryptocurrency regulatory framework, it has taken steps to oversee the industry in some form, primarily through tax and anti-money laundering measures. In terms of taxation, as previously mentioned, a 30% tax is levied on profits from cryptocurrency transactions, along with the implementation of TDS. Regarding anti-money laundering, cryptocurrency exchanges operating in India must comply with the Prevention of Money Laundering Act (PMLA). These measures represent a pragmatic approach to cryptocurrency regulation, allowing the government to exert some control over the crypto industry without explicitly legalizing or banning cryptocurrencies by focusing on tax and AML compliance.

In 2024, one of the world's largest cryptocurrency exchanges, Binance, announced its successful registration as a reporting entity in India, marking a significant turning point in India's cryptocurrency regulatory landscape. Binance complies with India's AML standards and aligns with the government's focus on preventing illegal activities in the cryptocurrency sector. Therefore, Binance's successful registration may serve as a catalyst for India to develop a more comprehensive cryptocurrency regulatory framework, allowing global cryptocurrency participants to operate within India's regulatory framework and potentially encouraging the government to establish more detailed guidelines for the industry.

5. Summary and Outlook on India's Taxation and Regulatory Framework for Crypto Assets

Although India has not established a comprehensive regulatory framework for crypto assets, it has initiated preliminary management through taxation. In other regulatory aspects, despite the lack of specific legislation, some exchanges have adopted self-regulatory measures, such as implementing strict KYC and AML procedures.

Looking ahead, as the global cryptocurrency market develops, the Indian government may introduce more comprehensive regulatory policies. The successful registration of international participants like Binance as a reporting entity in India demonstrates their willingness to adapt to the local regulatory environment, which may encourage the government to formulate more detailed guidelines, thereby achieving a balance between financial security and innovative development. At the same time, tax compliance and anti-money laundering will be key factors for the sustainable and healthy development of the Indian crypto asset ecosystem. For countries, the development of cryptocurrencies is an ongoing process of adapting to technological advancements, balancing innovation and risk, and gradually aligning with international standards, striving to establish a more stable and mature market environment to promote the healthy development of the cryptocurrency industry.

References

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