Author: TaxDAO
The Republic of India, the largest country in the South Asian subcontinent, has a land area of about 2.98 million square kilometers, ranking seventh in the world, and a population of 1.44 billion. Since 2021, India has become the fastest growing large economy in the world, with an average economic growth rate of 6.5%, twice the global average. According to estimates by the International Monetary Fund (IMF), in 2023, India's GDP will reach US$3.53 trillion, surpassing the United Kingdom to become the world's fifth largest economy. In April 2024, the IMF raised its forecast for India's economic growth in 2024-2025 from 6.5% to 6.8%, due to strong domestic demand and an increase in the working-age population. In recent years, most of India's economic activities have been driven by investment, with annual investment accounting for 33.7% of GDP in 2023, up from 31.6% before the pandemic. This is mainly due to the Indian government's promotion of infrastructure investment, which offsets the drag of sluggish growth in private consumption, government consumption and slowing external demand. In addition, the attractiveness of the Indian market to investors has grown simultaneously. Morgan Stanley analysis believes that the Indian stock market has become the world's fourth largest stock market and is expected to become the world's third largest stock market by 2030. Multinational companies' confidence in India's investment prospects is at an all-time high. However, India also has obvious imbalances, with a large difference between total GDP and per capita GDP, a serious tilt in economic and industrial structures, and a disparity in national living standards between regions. From an overall level, India is already the world's fifth largest economy, but from a per capita level, it still hovers around 140th, far below China, Mexico, South Africa and others. 2. Overview of India's Basic Tax System 2.1 India's Tax System India's tax system is based on the provisions of the Indian Constitution. According to Article 265 of the Indian Constitution, "Taxes cannot be levied administratively without the authorization of Parliament". The power to collect taxes in India is mainly concentrated between the federal central government and the states. Local municipal governments are responsible for collecting a small number of taxes. There is a clear division of taxation between the central government and the states. The taxes collected by the central government (Central Taxes) include two categories: direct taxes and indirect taxes. Direct taxes mainly consist of corporate income tax, personal income tax and property tax, and indirect taxes mainly include goods and services tax, tariffs, etc. Taxation in India is mainly managed by the Indian Revenue Service (IRS), whose subordinate Central Bureau of Direct Taxes manages direct tax-related matters such as income tax and property tax; the Central Board of Excise and Customs (CBEC) manages India's customs and indirect tax matters such as central excise tax and service tax. State governments mainly collect goods and services tax, stamp duty, state excise tax, entertainment and gaming tax, land income tax, etc. In areas not covered by goods and services tax, such as petroleum products and liquor, original taxes such as value-added tax (sales tax in states that have not implemented value-added tax) continue to be levied. Taxes levied by local city governments mainly include property tax, market entry tax, and tax on the use of public utilities such as water supply and drainage. Tax collection in India strictly follows the principle of tax legality. Since Indian law adopts the Anglo-American legal system (common law system/maritime law system), although Indian tax laws (statutes or written laws) are constantly increasing and improving, they are still subject to the interpretation of case law. Case law generally refers to legal principles or rules established in the judgments of high courts, which are binding or influential on subsequent tax case judgments.
2.2 Corporate Income Tax
In India, companies should pay corporate income tax on their income. There is no separate capital gains tax in India, and capital gains are included in the taxable income for corporate income tax. The Income Tax Act of 1961 provides for the minimum alternative tax, dividend tax and share repurchase distribution tax. The Finance Act of 2020 abolished the dividend distribution tax and levied income tax on dividend income in the hands of shareholders. The tax year is from April 1 of the current year to March 31 of the following year.
Resident companies are companies that are registered in India and have their place of actual management in India. The place of actual management (POEM) is the place where the key decisions and business decisions for the overall operation of the company are made.
Taxable income for income tax is divided into four categories: ① operating profits or gains; ② property income, including self-use, rental residential and commercial properties. If the property is used for the company's business operations, it does not fall into this category; ③ capital gains; ④ income from other sources, including lottery prizes, competition prizes and securities interest. Competitions include horse racing, cards and other gambling games. Tax-free income includes: ① equity income of partnerships; ② long-term capital gains; ③ income from overseas labor services; ④ government bond income; ⑤ relief fund income.
The basic corporate income tax rate for domestic enterprises is 30%. In addition, enterprises should also pay corresponding additional taxes and health and education surcharges based on the amount of corporate income tax. Certain enterprises are subject to specific preferential tax rates: (1) Small and medium-sized enterprises with a total turnover or total revenue not exceeding RS 4 billion are subject to a 25% corporate income tax rate without enjoying tax exemptions or incentives; (2) Production, manufacturing, R&D enterprises and supporting enterprises registered on or after March 1, 2016 are subject to a 15% corporate income tax rate without enjoying tax exemptions or incentives, and pay an additional tax of 10%; (3) Domestic R&D (according to the Patents Act, 1970, at least 75% of the R&D expenses are incurred in India) and royalties obtained from registered patents are subject to a 10% corporate income tax rate; (4) Domestic limited liability partnerships are subject to a 30% corporate income tax rate, which is the same as unincorporated partnerships; (5) Foreign enterprises and limited liability partnerships established overseas are subject to a 40% corporate income tax rate, pending.
Non-resident companies and their branches are generally subject to a corporate income tax rate of 40%, plus a surcharge of 2% (if net income exceeds RS 10 million but does not exceed RS 100 million) or 5% (if net income exceeds RS 100 million), and a health and education surcharge of 4% on the tax payable.
India offers a wide range of income tax incentives, including full or partial tax exemptions, reduced tax rates, tax refunds, accelerated depreciation or special deductions. The tax incentives are available to a wide range of industries, including export-oriented companies, industrial operations in free trade zones and science parks, infrastructure development, hotels, tourism, companies 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 businesses that manufacture products or provide services in SEZs are eligible for a number of tax incentives, including 100% tax exemption on profits and gains in the first five years, 50% tax exemption on profits and gains in the next five years, and a further 50% tax exemption for the next five years if certain conditions are met; and longer tax exemptions for approved developers. 2.3 Personal Income Tax Indian residents are taxed on their worldwide income. Individuals who reside in India but are not ordinarily resident are subject to income tax only on income derived in India, income deemed to be accrued or derived in India, income received in India, or income received outside India but from companies controlled by Indian persons or incorporated in India.
Non-resident Indians are taxed only on income derived in India and income received, accrued or derived in India. Non-resident Indians may also be taxed on income accrued or derived in India through business relationships, income derived from any asset or source of income in India, or income derived from alienation of assets situated in India (including shares in a company incorporated in India).
Income is taxed in India on a graduated system. Income tax for foreign nationals in India is determined on the basis of their tax residency status. An individual's income is taxed at progressive rates depending on his or her residency status in India and the level of income as provided for in the Income Tax Act, 1961. Non-employment income is taxed at variable rates depending on the type of income. Resident individuals are subject to a tiered comprehensive tax system with progressive tax rates. Calculation method: The taxpayer adds up all types of income (wage income, real estate income, business income, capital gains and other income) and deducts tax benefits, tax-free income, pre-tax deductions (insurance expenses, medical expenses, education expenses, charitable donations, etc.) and the allowable loss of previous years. The tax amount after applying the excess progressive tax rate to the taxable income is the tax payable. On this basis, the additional tax, education surcharge and secondary and above education surcharge are calculated to obtain the total taxable amount of income tax. Non-resident taxpayers must pay withholding income tax at the same tax rate as resident taxpayers. If the annual net income exceeds 10 million RS, they must also pay a 15% additional tax and a 4% health and education surcharge.
Personal income tax rates
Subject to certain requirements, the following benefits may enjoy preferential tax treatment: (1) company-provided housing; (2) accommodation provided to employees working in mining areas or onshore oil exploration areas, project construction sites, dam sites, power plants or offshore. The following items paid by the employer, provided that they do not exceed the prescribed limits, do not need to be included in the employee's taxable remuneration: (1) reimbursed medical expenses; (2) contributions to Indian retirement benefit funds, including provident funds, pensions and old-age pension funds. Certain allowances (including rental allowances and holiday travel allowances) may be exempt from tax or included in taxable income at a lower value, subject to certain conditions. Additional allowances paid at the beginning or end of employment must be included in taxable remuneration. Life insurance premiums, social security contributions, and tuition and fees for full-time education at universities, colleges or other educational institutions can be deducted from income, up to a maximum of RS 150,000. 2.4 Goods and Services Tax The predecessor of India's goods and services tax was sales tax, which was levied on intra-state and inter-state sales and import and export trade under the Central Sales Tax Act of 1956. In 2005, value-added tax replaced sales tax. Since July 1, 2017, value-added tax has been replaced by goods and services tax (GST). After India implemented the goods and services tax (GST) reform, goods and services tax includes value-added tax (VAT), central excise duty, vehicle tax, goods and passenger tax, electricity tax, entertainment tax and other taxes. Goods and services tax is an indirect tax and a transaction-based tax system. At present, there are some products that are still not covered by 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, there are four basic rates of GST, namely 5%, 12%, 18% and 28%, each of which is the combined tax rate of CGST and SGST, that is, 50% each. In addition, there are two rates of 0.25% and 3% applicable to diamonds, unprocessed gemstones and small quantities of goods such as gold and silver. Therefore, if the zero tax rate on exports is not included, India's GST actually has 6 tax rates. In addition, in addition to the above-mentioned GST rates, the GST law also imposes additional taxes on the sale of certain goods (such as cigarettes, tobacco, aerated water, gasoline and motor vehicles), ranging from 1% to 204%. The tax rate for most goods is below 18%, while certain luxury goods and harmful goods are subject to a 28% tax rate, and additional taxes are also levied. 3. India's Crypto Asset Tax System 3.1 Overview of India's Crypto Tax The Indian Income Tax Department (ITD) introduced Section 2(47A) in the Income Tax Act, defining Virtual Digital Assets (VDA). This definition is quite detailed and covers 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 (plus applicable surcharge and 4% surcharge) on profits earned from trading cryptocurrencies from April 1, 2022. This tax rate is in line with the highest income tax bracket in India (excluding surcharge and surcharge), and this rate is applicable to private investors, commercial traders, and anyone who transfers crypto assets in a given financial year. In addition, the 30% tax rate will be applicable to all income, regardless of the nature of the income, which means there will be no distinction between short-term and long-term gains, whether it is investment income or business income.
In addition to the 30% tax rate, another clause, Section 194S, also provides for a 1% tax deducted at source (TDS) on the transfer of crypto assets from July 1, 2022, if crypto transactions exceed RS50,000 (or RS10,000 in some cases) in a financial year to ensure that all crypto transactions are tracked. Tax-exempt behaviors include: holding cryptocurrencies (HODLing); transferring cryptocurrencies between one's own wallets; receiving cryptocurrencies worth less than RS50,000; receiving cryptocurrencies from immediate family members in any amount.
When trading cryptocurrencies/NFTs, Indian investors 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 asset holdings. From the 2022-2023 fiscal year and beyond, a new schedule specifically for reporting cryptocurrency/NFT gains has been added to the income tax return, called the Schedule - Virtual Digital Assets. This schedule continues to apply to the returns for the 2023-2024 fiscal year. 3.2 Specific application of crypto tax You need to pay a 30% crypto tax when you make the following transactions: selling cryptocurrencies for Indian RS or other legal currencies; using cryptocurrencies for crypto transactions, including stablecoins; using cryptocurrencies to pay for goods and services. However, crypto assets are not always subject to the 30% tax rate, and sometimes the income tax department will treat them as other income. In these cases, tax will be paid according to the personal income tax bracket (see 2.3), including: receiving crypto gifts (if you are a donee); mining cryptocurrencies; paying wages in cryptocurrencies; staking rewards; airdrops. If you subsequently sell, trade or use these cryptocurrencies, you may need to pay a 30% tax on the profits you make. The ITD has not yet issued specific guidance on DeFi transactions. You need to refer to the existing provisions of the income tax law. The following DeFi transactions may be taxed at personal income tax rates when received: new tokens, governance tokens or reward tokens obtained through liquidity mining; referral rewards; income earned from games; income from browsing earning platforms such as Permission.io or Brave. Even if the tax has been paid at the time of receipt, if you sell, exchange or use these tokens later, you will still need to pay a 30% tax on the profits. 3.3 Tax Deducted at Source (TDS) In India, investors pay a 1% tax deducted at source (TDS) on the transfer of crypto assets. TDS is a tax levied at source. The main reason for introducing 1% TDS is to capture transaction details and track the investment of Indian investors in crypto assets. There are a few things to note about TDS: TDS is applicable for transactions after July 1, 2022; When trading on an Indian exchange, TDS will be deducted by the exchange and paid to the government; When trading through a P2P platform or an international exchange, the buyer is responsible for deducting TDS; In transactions between cryptocurrencies, TDS will be levied at 1% each on both the buyer and the seller. It is important to note that if the transaction amount is paid by a "specified person" and the total value of their crypto trading activities does not exceed RS50,000 in a financial year, no TDS will be deducted. Specified person refers to an individual or HUF (Hindu Joint Family). If the trader has no business income in the previous financial year, or their sales/gross income/business income does not exceed RS100 million, or their sales/gross income/professional income does not exceed RS500,000, the TDS limit will be reduced from RS50,000 to RS10,000.
If trading is done on Indian exchanges, usually TDS requirement will be done directly by the exchanges, so there is no need to do it at the time of tax return. But in P2P and international exchange transactions, the responsibility of paying and declaring TDS as a specified person is as follows: In P2P transactions and international exchange transactions, TDS needs to be submitted through Form 26QE within 30 days after the end of the month of deduction. Currently, this form is not available on the income tax portal, so investors need to wait for clear instructions from ITD on how to deposit and pay TDS. All non-specified persons need to obtain a TAN number, submit Form 26Q on a quarterly basis, and pay TDS tax before the 7th of the next month. In addition, the total tax payable can be reduced by claiming TDS credit at the time of tax return.
3.4 Taxation of losses and losses
Under Section 115BBH, losses in cryptocurrencies are prohibited from being deducted against gains in cryptocurrencies or any other gains or income. Crypto investors in India are also not allowed to claim crypto-related expenses unless they are the acquisition cost/purchase price of the asset.
The Indian Income Tax Department (ITD) has not given clear guidance on lost or stolen cryptocurrencies, but based on judgments rendered by Indian courts on loss or theft of other assets, losses in cryptocurrencies due to hacking, fraud or theft are generally not taxable. However, given the strict rules of the ITD on loss deductions for cryptocurrencies, it is difficult for investors to claim losses due to lost or stolen crypto assets.
The Indian cryptocurrency industry is going through a period of uncertainty, reflected not only in the lack of a comprehensive regulatory framework at the national level, but also in the vacillation of regulators in their attitude towards cryptocurrencies. The Indian Crypto Bill is seen as a potential game-changer, and it is expected to pave the way for digital currencies issued by the Reserve Bank of India (RBI), suggesting an advancement that could put India at the forefront of the central bank digital currency (CBDC) revolution. However, the reality is much more complicated. After years of preparation, the bill has undergone multiple amendments and delays, and its content remains unclear to this day, with conflicting views on its stance on private cryptocurrencies.
The bill’s journey reflects the global struggle to effectively regulate digital assets. Although governments see the potential of blockchain technology and digital currencies, concerns about financial stability, investor protection, and preventing illegal activities remain significant. Further complicating the situation is a recent statement from the Indian Ministry of Finance, which said that there is no legislative proposal to regulate digital asset trading, a statement that came as a surprise to many given that discussions on the Cryptocurrency Bill are still ongoing. This apparent contradiction points to the different views on cryptocurrency regulation within the Indian government, while also highlighting the challenges policymakers face in keeping up with the rapidly evolving cryptocurrency space.
Given the challenges of top-down regulation, there is growing support within the Indian cryptocurrency industry for self-regulation. This approach could find a middle ground between unfettered market freedom and strict government control. Self-regulation in the cryptocurrency space could involve industry-led initiatives to establish best practices, implement strong KYC and anti-money laundering (AML) procedures, and establish consumer protection mechanisms. By proactively addressing regulatory issues, the crypto industry can demonstrate its commitment to responsible growth and potentially ease some of the government's concerns.
Indeed, some Indian cryptocurrency exchanges have already taken steps in this direction. For example, WazirX, a large cryptocurrency exchange in India, has implemented strict KYC procedures and cooperates with law enforcement agencies to prevent illegal activities. However, self-regulation may not adequately address all regulatory issues and may lead to conflicts of interest. Despite these challenges, self-regulation may still play a key role in the short to medium term, especially given the current regulatory uncertainty. While India may lack a comprehensive regulatory framework for cryptocurrencies, it has taken steps to impose some form of oversight on the industry, mainly tax and anti-money laundering measures. On the tax side, as mentioned above, this includes a 30% tax on cryptocurrency trading profits and the implementation of tax withholding at source (TDS). On the anti-money laundering side, cryptocurrency exchanges operating in India must comply with the Prevention of Money Laundering Act (PMLA). These measures represent a pragmatic approach to cryptocurrency regulation, and by focusing on tax and anti-money laundering compliance, the government has found a way to exercise some control over the cryptocurrency industry without explicitly legalizing or banning cryptocurrencies.
In 2024, Binance, one of the world's largest cryptocurrency exchanges, announced its successful registration as a reporting entity in India, marking an important turning point in India's cryptocurrency regulation. Binance complies with India's anti-money laundering (AML) standards, which is consistent with the government's focus on preventing illegal activities in the cryptocurrency field. Therefore, Binance's successful registration may become a catalyst for India to develop more comprehensive cryptocurrency regulation, and global cryptocurrency players may be able to operate within India's regulatory framework and may encourage the government to develop more detailed guidelines for the industry.
Although India has not yet established a comprehensive regulatory framework for crypto assets, it has initially managed them through tax means. In other regulatory aspects, despite the lack of specific legislation, some exchanges have taken self-regulatory measures, such as implementing strict KYC and AML procedures.
Looking ahead, as the global crypto market develops, the Indian government may introduce more comprehensive regulatory policies. International players such as Binance have successfully registered as an Indian reporting entity, demonstrating their willingness to adapt to the local regulatory environment, which may prompt the government to formulate more detailed guidelines to achieve a balance between financial security and innovative development. At the same time, tax compliance and anti-money laundering will be key factors in the continued healthy development of India's crypto asset ecosystem. For all countries, the development of cryptocurrencies is a process of constantly adapting to technological development, balancing innovation and risk, and gradually aligning with international standards, striving to establish a more stable and mature market environment and promote the healthy development of the cryptocurrency industry.
References
[1]. Wijaya, D. A., Liu, J. K., SuwaRSono, D. A., & Zhang, P. (2017). A new blockchain-based value-added tax system. In Provable Security: 11th International Conference, ProvSec 2017, Xi'an , China, October 23-25, 2017, Proceedings 11 (pp. 471-486). Springer International Publishing. -added tax system. Journal of Management Information Systems, 38(2), 288-313.[3].2023 India Cryptocurrency Tax Guide: Policy, Optimization and Compliance Key Points. TechFlow.[4].Wang Tuo, & Liu Xiaoxing. (2021). The Origin, Technological Evolution and Future Trends of Digital Currency. Shenzhen Social Sciences.[5].Zhang Ping, & Wang Jingmin. Research on Improving Tax Compliance by Applying Blockchain Technology from the Perspective of Behavioral Finance. Journal of Central University of Finance and Economics, (10), 3-9.[6].India imposes a huge income tax of 30% on cryptocurrency transactions. (n.d.). [7]. Taxation and legality of cryptocurrencies in India. Law.asia [8]. Cryptocurrency regulation in India in 2024. ComplyCube
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