Taxation

Are Indian Cryptoexchanges moving overseas amid 30% tax proposal?

The cloud of regulatory uncertainty on cryptocurrencies has been looming large over countries across the globe. Recently India proposed 30% tax on all digital assets which has resulted in several Indian cryptoexchanges mooting to shift their base out of India. United Arab Emirates and Singapore could well be the next crypto hubs as regulatory uncertainty grows across countries.

What are Cryptoexchanges?

Simply speaking, a crypto exchange refers to a platform on which you can buy and sell cryptocurrency. Cryptocurrency exchanges work as an intermediary between a buyer and a seller and it makes money through commissions and transaction fees. Some examples of online exchanges operating in India are -CoinDCX, CoinSwitch Kuber, and UnoCoin.

UAE and Singapore- Next Crypto Hubs?

Last year world’s biggest cryptocurrency exchange by volume- Binance, made a pact with Dubai World Trade Centre Authority. It is looking to establish an international virtual asset ecosystem. Dubai World Trade Centre Authority is a regulated zone for crypto service providers in Dubai. The UAE government has been desiring to create a favourable environment for cryptomining. Moreover, in a report by Bloomberg, UAE has been planning to issue a federal crypto license to virtual asset service providers by the end of the 1^st quarter of 2022. UAE has become one of the largest crypto market in the Middle East and is one of the fastest growing markets.

Meanwhile, Bloomberg reported that Singapore is putting in place strong regulation which will firms that satisfy its requirements can function.  Hence Singapore and Dubai are few of the places who have lured crypto investors. Apart from these, places like Miami, Estonia, Malta etc., have also been gradually developing into crypto hubs.

Indian crypto taxation proposal

The Finance Minister of India announced that earnings from cryptocurrencies shall be taxed at the rate of 30%. Further, she also remarked that losses from its sale cannot be offset against other income. The government also announced 1% TDS^[1] on digital assets.

The Indian Government has been looking to come up with a framework for the regulation of cryptos since a long time but is yet to introduce a crypto bill.

The Reserve Bank had earlier imposed a ban on cryptocurrencies in India which resulted in various cryptoexchanges in India forcing to shift their bases abroad. Despite a regulatory uncertainty, India has two crypto unicorns but the recent taxation proposal may make it tough for fund raising by the industry owing to the fact that TDS compliance and high tax rate can make it difficult for exchanges to set up establishments in India. 

Consequences

As per experts having unfriendly taxation policy can result in companies moving out of the country and establishing their base in countries with tax friendly norms. Various exchanges are setting up their headquarters in countries like Singapore, Dubai, USA etc., considering the regulatory certainty.

In the United States, the IRS sees cryptocurrency as a capital asset. It means that taxes has to be paid on gains obtained from selling them. Hence one needs to pay short term capital gains tax in case where security is held for not more than 1 year. Holding a crypto asset would mean no taxation is involved. In case of a loss, one doesn’t owe any taxes on such transaction, but such losses needs to be reported when filing tax return.

Recently, an ethereum scaling platform shifted its operations from India to Dubai and US because of the policy uncertainty. However, it’s not just the regulatory uncertainty that prompts exchanges to shift bases but also because of the fact that tomorrow if there is a regulation banning cryptos, then it may have catastrophic consensuses on such businesses.

Practicality of moving cryptoexchanges bases overseas

One of the reasons why cryptoexchanges are moving their base overseas is because countries like Singapore and Dubai have a clear regulatory and tax regime. Further moving their bases overseas will also help cryptoexchanges to avoid the repercussion of Indian tax laws.

However, if they shift their bases overseas then they may have to register themselves in such country and the exchange must operate as per the laws and regulations of such country.

Further crypto exchanges from India will also need to examine Indian Exchange Control Regulations on outbound investments to set up such exchange overseas in a compliant manner. Investor from overseas can be lured by setting up exchanges outside India. One notable thing here is that even though an exchange shifts its base from India, it will still be required to pay tax here.

The crypto traders will be required to pay tax at the rate of 30% on transfer of cryptocurrency from the exchange that is located overseas, and 1% TDS will be deducted on the transfers subject to the threshold limit. 

The reason for this argument can be that cyrptoexchanges based in foreign provides for crypto transactions for people living in India hence there is a business connection.

The investors in India would be governed by the newly proposed provisions under the Finance Bill 2022 on the other hand, foreign investors may not be taxed in India.

Conclusion

The Indian government hasn’t granted a status of legal tender to cryptocurrencies. The RBI had banned cryptocurrencies in 2018 but it was overruled by the Supreme Court of India. However, cryptocurrencies have not managed to escape from taxation. The taxation rule has resulted in various cryptoexchanges mooting for shifting their bases abroad however it may not be free from complexity.

Read our Article:Section 194R of the Income Tax Act- Brief Analysis