India – 2
The Indian bureaucrat’s innovation in the crypto regulation game has been to define a category called “virtual digital asset” (VDA) and then tax it heavily to the point where every incentive to transact is taken away. From Bloomberg: “On July 1, a tax deductible at source of 1% on all digital-asset transfers above a certain size takes effect despite industry warnings that it will sap liquidity. That’s on top of an existing 30% rate on income from such assets plus a proposed value-added tax increase that’s making its way through the bureaucracy. The government also doesn’t permit offsetting of trading losses on cryptocurrencies, treating them differently from stocks and bonds.” If that wasn’t enough to kill the golden goose, there’s more: “Adding to the pain, crypto exchanges have been largely cut off from the regular banking system since mid-April. That’s when India’s ubiquitous United Payments Interface was made unavailable to them without explanation, prompting some banks and payment gateways to also cut off service, which in turn meant traders couldn’t top up their accounts with cash.”
The definition of VDA is explained in this note from E&Y
Limb A
- It means any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called,
- Providing a digital representation of value which is exchanged with or without consideration,
- With the promise or representation of having inherent value or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to investment scheme; and
- It can be transferred, stored, or traded electronically.
Limb B
- A NFT or any other token of similar nature, by whatever name called. But NFT itself is defined to mean such digital asset as the CG (Central Government) may, by notification in the Official Gazette, specify
Limb C
-
any other digital asset, as the CG may, by notification in the Official Gazette, specify
Of course, Indian and foreign currency is excluded from the above.
And as so often happens, there came an exclusion list:
- Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
- Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
- Subscription to websites or platforms or application
Another clarification was issued: “The CG has notified that a “token” which fulfils the definition of VDA under Limb A shall be NFT. But it shall not include a NFT whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.”
VDA and the concomitant crypto regulation is now a bureaucrat’s delight and an entrepreneur’s nightmare. The ostensible targets were the cryptocurrencies and crypto exchanges. The Indian government succeeded; trading in alternate currencies has now almost ground to a halt.
The side-effect of this is going to be that any Web3/crypto company with a token as its model will not be able to operate in India. They will simply domicile themselves outside India. And Indians will figure out a way – like they always have – to participate. Black money and smuggling were the answer to high taxation and bans in the India of the 1970s. Governments will never learn. The phrase “laissez faire” which literally means “let go” does not exist in their dictionaries.
So, where does India go from here? What are the Web3 opportunities in India? What about Indian entrepreneurs wanting to build Web3 businesses?
