Effect of Budget 2023-24 on Digital Assets & CBDC
Created on 01 Feb 2023
Wraps up in 6 Min
Read by 1.6k people
Updated on 02 Feb 2023
So, the Budget 2023 just got presented by our Finance Minister Nirmala Sitaraman, and if you are a Crypto/ Blockchain enthusiast like me, you might be wondering, “What’s the update on Cryptos?” (or as the government likes to call it Virtual Digital Assets)
In short, it goes something like this:
Yeah, that’s right, you may leave this article at this point if we don’t share the same sense of humour and have the same level of understanding about the state of Digital Assets/Currencies. But, since you’re here and I’m hoping you stay till the end, I have something for you that excites me a lot.
The state of Cryptocurrency has been such that it is accepted by Indians but not by the Indian government. The apparent reason for this is that digital assets are wildly volatile, and the government doesn’t want to lose control over the country's financial system. Indians have adopted them with massive fervour because they see heavenly gains in trading.
Crypto Tax in India
As of 2022, India ranks 4th in the Global Crypto adaptation index, which makes it too big to ban for the Indian government. So playing smart, the government of India has imposed taxes on cryptocurrency gains. If I summarise the taxation in one line, it would be tumhara loss tumhara, tumhare profit ka 30% humara.
But cryptocurrency taxation isn’t limited to 30%; it goes past that. These are the pointers one should keep in mind:
- Income from the transfer of virtual digital assets such as crypto and NFTs will be taxed at 30% at the end of each financial year.
- No deduction, except the acquisition cost, will be allowed while reporting income from the transfer of digital assets.
- Loss from digital assets cannot be set off against any other income.
- The gifting of digital assets will attract tax in the hands of the receiver. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.
- Although it was declared after the budget, a 1% TDS is levied on all VDA and crypto transfers, subject to certain conditions on the transferer’s income and legal status.
According to section 115BBH of the Finance Bill, a taxable event is defined as:
- Conversion of digital assets to INR or fiat currency.
- Conversion of one type of virtual digital asset to another class, which may include crypto-to-crypto trading or trading in stablecoins.
- Paying for goods and services using a virtual digital asset.
Any profits that will or have been earned from the above transactions are subjected to a 30% tax, which is equivalent to India’s highest income tax bracket. Furthermore, if the transaction exceeds ₹10,000, it will be taxed at an additional 1%.
However, not all crypto transactions are subjected to the 30% tax. Activities like gifting crypto, staking rewards, receiving payments, airdrops, mining coins and other DeFi (decentralised finance) transactions are put under the lens to be viewed as “income.” When such incidents occur, taxes are calculated per the recipient’s income tax rate.
However, if one wishes to hold the assets and sell them later, they will be liable to pay a 30% tax on any appreciation in the asset’s market value.
Finance bill 2023 updates
Suppose anyone is found defaulting on deducting and paying the 1% TDS mentioned before. In that case, they will be liable for a penalty which will be a fine equivalent to the tax liability and/or imprisonment from 3 months to 6 years. In the earlier finance bill, no such penalty was mentioned. So a loophole is being filed.
CBDC vs Crypto
CBDCs, or Central Bank Digital Currencies, don't come in the vertical of Cryptos and blockchain. The Indian Government has classified Crypto and NFTs as Virtual Digital Assets, not currencies. Only CBDCs are only considered as currencies because they are digital versions of traditional fiat currencies issued and backed by a central authority, such as a central bank. For example, anyone could launch a crypto, but only the Central Bank of a Country can launch a CBDC.
State of CBDCs in India-
In India, the Reserve Bank of India (RBI) has launched its CBDC (e₹), and it’s called Digital Rupee (not e-Rupee).
CBDC can be classified into two broad types: general purpose for retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC is available for everyone, including the private sector, non-financial consumers and businesses, while wholesale CBDC is designed for restricted access to select financial institutions. While CBDC-W is intended to settle interbank transfers and related wholesale transactions, CBDC-R is an electronic version of cash primarily meant for retail transactions.
It is believed that Retail CBDC can provide access to safe money for payment and settlement as it is a direct liability of the Central Bank. Wholesale CBDC has the potential to transform settlement systems for financial transactions and make them more efficient and secure. Going by the potential offered by each of them, there may be merit in introducing both CBDC-W and CBDC-R.
Forms of CBDC
CBDC can be structured as ‘token-based’ or ‘account-based’. A token-based CBDC is a bearer instrument like banknotes, meaning whosoever holds the tokens at a given time would be presumed to own them. In contrast, an account-based system would require maintaining a record of balances and transactions of all holders of the CBDC and indicating the monetary balance ownership. Also, in a token-based CBDC, the person receiving a token will verify that his ownership of the token is genuine. In contrast, in an account-based CBDC, an intermediary verifies the identity of an account holder. Considering the features offered by both the forms of CBDCs, a token-based CBDC is a preferred mode for CBDC-R as it would be closer to physical cash, while an account-based CBDC may be considered for CBDC-W.
One of the main benefits of CBDCs is that they can provide a more secure and efficient payment system. CBDCs can help reduce the risk of fraud and counterfeiting and provide a more secure and transparent way of transmitting payments. This can help to promote financial inclusion and reduce the cost of remittances, especially for those who are unbanked or underbanked.
In addition to these benefits, CBDCs can also help address the challenges of financial instability and increase the financial system's resilience. This is because CBDCs are issued and backed by central banks, which are more stable and less prone to failure than other financial institutions. CBDCs can also help to reduce the risk of financial exclusion, as they can be used by anyone with access to a digital device, regardless of their location or financial status.
However, some potential risks are associated with CBDCs, including the possibility of increased financial crime and monetary policy interference. CBDCs can also have a significant impact on the existing economic infrastructure, as well as on the traditional banking sector. Therefore, any CBDC launch must be carefully planned and considered.
There have also been discussions about the potential impact that a CBDC could have on the monetary policy of the RBI, as well as on the stability of the financial system. Some have also raised concerns about the potential impact that a CBDC could have on the traditional banking sector and the stability of the banking system as a whole.
The Bottom Line
India’s launch of CBDCs shows a positive step toward adopting blockchain technology, which can help prevent the circulation of black money and stop dual economies from existing. On the other hand, Cryptos will be taxed at such high rates, and more regulation will be imposed on trading virtual digital assets. One more thing you should keep in mind is that crypto can be a part of your financial strategy if you have that risk-taking capacity, but it’s not necessary, so don’t let FOMO (Fear of missing out) stop you from DYOR (Doing your own Research).
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