Government to change Tax Laws to tax the Cryptocurrency Gains : Will it solve the real fear of the Central Bank /RBI

(GS 3, Economics, The Hindu, Indian Express)  

News/Context: The revenue secretary to the Government of India Tarun Bajaj said that the government is pondering over changes to the income tax laws to bring the cryptocurrencies under the tax net and we can witness some changes that could be part of the budget next year.

The  Revenue Secretary said the law is very clear in respect of goods and services tax that the rate could be applicable as those in case of other services, while some people are already paying capital gain tax on the income of cryptocurrency.  

With an understanding that people are already paying taxes on the income of cryptocurrencies but as the trading of cryptocurrency has really grown a lot, the government is likely to bring some changes in law position in the next budget which is near. 

The secretary over a question whether provision of tax collected at source will be introduced for cryptocurrency trading said that the government will see what is to be done if it comes  up with a new law. 

It is clear that  if somebody makes money,  they have to pay tax  on their income. 

People involved in cryptocurrency trading would be categorised as facilitator, trading platform and brokerage and they will be charged as per the existing GST rate for providing financial services. So whatever GST rates they are taxed at, they will be applicable on them. They required to get themselves registered . In terms of brokerage the GST law is very clear. In case of any economic activity if a broker is charging brokerage fees for helping people, GST would be applicable. 

In addition the winter session of Parliament beginning November 29 can witness a bill on cryptocurrencies, to be introduced by the government amid concerns over cryptocurrencies being  allegedly used for   luring investors with misleading claims. There is a fear among economists that  there could be a flood of ponzi schemes  in respect of cryptocurrency, which we are already witnessing. The number of advertisements featuring celebrities, promising high and easy returns on the investment in cryptocurrencies, are on a rise. 

At present there is no ban or no regulation on the use of cryptocurrencies in the country. It is to be noted that indications are  strong that regulatory steps to be taken to deal with the issue as the Prime Minister recently held a meeting on cryptocurrency with senior officials. Separately in a meeting with Blockchain and Crypto Asset Council (BAAC), Standing committee on finance arrived at a conclusion that cryptocurrencies should  not be banned  but it should be regulated. 

The central bank of the country, the Reserve Bank of India reiterated its strong views against cryptocurrencies and doubted the number of investors trading on cryptocurrencies as well as their claim to market value. As per the RBI cryptocurrencies pose a serious threat to the financial and macroeconomic stability of the country. Earlier the the RBI had announced its intent to come out with an official digital currency in the backdrop of proliferation of cryptocurrencies such as Bitcoin about which the central bank has many concerns. We have witnessed in the past decade that the the virtual currency/Private digital currency/ cryptocurrency have gained popularity, But the Government and the regulators across the globe have been sceptical about these currencies and apprehensive about the associated risks. It is to be noted that RBI’s  regulatory circular of April 6 2018 regarding the the prohibition on dealing in virtual currencies by banks and entities regulated by it, was set aside by the Supreme Court on March 4 2021. Then onwards we have witnessed a  surge in cryptocurrencies and its popularity. 

Why the central banks are considering the cryptocurrencies as a threat to the financial stability: To understand this we have to look into different markets of cryptocurrency. There are basically two kinds of market. The first one is when you buy the cryptocurrency using the Fiat currencies for example rupees or dollar. The second market which is the real market where you buy goods and services using cryptocurrencies. The first market could be traced by the government and can be taxed as per the existing taxation laws or by bringing some changes in the existing taxation laws. For example if you buy 1 Bitcoin for 40 lakh rupees and sell it for 42  lakh rupees, you get a capital gain of 2 lakh rupees. Here 2 lakh rupees is your income and you need to pay capital gain tax on 2 lakh rupees. Here the government is likely to be happy.  In addition to this, if anybody helps you in selling these cryptocurrencies and charges  from you,  they need to collect service tax under GST from you as they have provided services. Here also the government is happy. The provision of tax collection at source could also be applicable here. In case of tax collection at source,  you while selling the said Bitcoin in 42 lakh rupees  to anybody say X, will collect TCS from X as per the applicable rate and will submit it to the government.  Here again the government is happy.

(It is to note here Tax collection at source collected by you from the person X buying Bitcoin from you in 42 lakh rupees, is the part of the income tax of X.  X can get the refund of the same while filing his income tax return. The point is that X should not be charged twice on the same income.)

Now come to the second market in which somebody is buying goods and services using cryptocurrencies. It is to be noted here that cryptocurrencies are encrypted online records of all economic exchanges, using the blockchain technology. These online records are encrypted and cannot be deciphered by the government. What exchanges took place, what kinds of goods and services bought, how much income has been earned while buying and selling any goods or services against cryptocurrencies or what if somebody has kept their income in the form of cryptocurrencies, the government will not have any knowledge of these and it will be impossible to collect the tax. The government will not be happy. The above discussed feature of the cryptocurrency is the  major reason for its popularity and demand among people across the world who don’t want to pay taxes to the government or do not want the information regarding their economic exchange to be known to anybody, especially the government. which is most likely to be illegal like bribery, corruption, terror funding or evasion of tax etc. ( with the increment in demand among the said section of people, its prices  started increasing sharply. Looking into this many investors jumped into this market and started buying cryptocurrencies, Which further fuelled the prices of cryptocurrencies.  People are today buying and selling cryptocurrencies to earn the capital gain) This  poses a potential threat in terms of safety and security of a country. 

As we know RBI through its monetary policy makes a balance between inflation and growth by controlling the money supply. This money supply is essentially in terms of rupees.  Hence through controlling rupees  RBI  tries to increase the GDP growth as well as tries to stabilize inflation. But what if the economic exchange took place  using cryptocurrency as a medium of exchange in place of rupees, means all economic activities are happening but rupees are not involved. It implies that a parallel economy  could be run using cryptocurrencies as money (medium of exchange) on which the Government or the RBI has no control.  In this case RBI’s monetary policy in terms of controlling rupees and hence controlling the economy will be ineffective. It seriously poses a threat to the financial stability of the country. 

Download Plutus ias daily current affairs 22 November 2021