Detailed Explanation of India's Taxation and Regulatory Policies on Encryption Assets

1. Introduction

India is one of the fastest-growing large economies in the world, with a GDP of $3.53 trillion in 2023, surpassing the UK to become the fifth-largest economy globally. In recent years, India's economic growth has been primarily driven by investment, with the annual investment-to-GDP ratio rising from 31.6% before the pandemic to 33.7% in 2023. However, India also faces significant imbalance issues, with a large disparity between total GDP and per capita GDP, a severely skewed economic and industrial structure, and stark differences in living standards across regions. Overall, India is the fifth-largest economy in the world, but in terms of per capita level, it still hovers around the 140th position, far lower than countries like China, Mexico, and South Africa.

2. Overview of India's Basic Taxation System

2.1 India's taxation system

The Indian tax system is based on constitutional provisions, with the authority to levy taxes primarily concentrated between the federal central government and the states. The taxes levied by the central government include two main categories: direct taxes and indirect taxes. Direct taxes mainly consist of corporate income tax, personal income tax, and property tax, while indirect taxes primarily include goods and services tax, customs duties, etc. State governments mainly levy goods and services tax, stamp duty, state excise duty, entertainment tax, land revenue tax, etc.

2.2 Corporate Income Tax

Indian companies should pay corporate income tax on their earnings. The basic tax rate for domestic companies is 30%, and they are also subject to additional tax and health education surcharge. Some companies qualify for specific preferential tax rates, such as small and medium-sized enterprises and newly registered manufacturing companies. Non-resident companies and their branches generally face a tax rate of 40%. India offers numerous tax incentives, including full or partial exemptions, reduced tax rates, refunds, accelerated depreciation, or special deductions.

2.3 personal income tax

Residents of India are required to pay taxes on their income worldwide. Personal income is taxed at progressive rates, ranging from 5% to 30%. Certain benefits may enjoy tax concessions, such as housing provided by the company, medical expense reimbursements, etc. Some allowances may be tax-exempt or included in taxable income at a lower value.

2.4 Goods and Services Tax

India has implemented the Goods and Services Tax ( GST ) reform since July 1, 2017. Currently, there are four basic GST rates, which are 5%, 12%, 18%, and 28%. In addition, there are two rates of 0.25% and 3% applicable to a small number of specific goods. Certain goods sales are also subject to an additional tax, with rates ranging from 1% to 204%.

3. India's encryption asset tax system

3.1 Overview of India's encryption tax

The Indian Income Tax Department has introduced a definition for Virtual Digital Assets ( VDA ) in the Income Tax Act, covering all types of encryption assets. Starting from April 1, 2022, a tax rate of 30% is levied on profits earned through trading cryptocurrencies. Additionally, from July 1, 2022, if the amount of crypto transactions exceeds a certain limit within a financial year, a 1% Tax Deducted at Source ( TDS ) is imposed on the transfer of encryption assets.

3.2 The specific application of encryption tax

A 30% encryption tax applies to situations such as selling cryptocurrencies for fiat currency, trading with cryptocurrencies, and using cryptocurrencies to pay for goods and services. In certain cases, such as receiving cryptocurrency as a gift or mining cryptocurrencies, taxes will be paid according to personal income tax brackets.

3.3 Source Deduction Tax(TDS)

Investors are required to pay 1% TDS on the transfer of encryption assets. When trading on Indian exchanges, TDS is deducted by the exchange and paid to the government. When trading on P2P platforms or international exchanges, the buyer is responsible for deducting TDS. Certain specific individuals may be exempt from deducting TDS when the transaction amount does not exceed a certain limit.

3.4 Tax regulations related to losses and losses

It is prohibited to use losses from encryption currencies to offset gains from encryption currencies or any other gains or income. Investors are also not allowed to declare expenses related to encryption currencies, unless it is the acquisition cost/purchase price of the asset. There is currently no clear tax treatment guidance for lost or stolen encryption currencies.

4. Overview of India's Encryption Asset Regulatory System

The Indian encryption industry is undergoing a period filled with uncertainty. Despite the lack of a comprehensive regulatory framework, India has taken some measures to oversee the industry, primarily focusing on taxation and anti-money laundering. Some exchanges have begun to implement self-regulatory measures, such as strict KYC and AML procedures.

In 2024, Binance successfully registered as a reporting entity in India, which could become a catalyst for India to develop more comprehensive encryption regulations.

5. Summary and Outlook on India's Encryption Asset Taxation and Regulatory System

Although India has not yet established a comprehensive regulation framework for encryption assets, it has implemented initial management through taxation measures. In the future, as the global encryption market develops, the Indian government may introduce more refined regulatory policies. Tax compliance and anti-money laundering will be key factors in the sustainable and healthy development of India's encryption asset ecosystem. India is striving to create a more stable and mature market environment to promote the healthy development of the cryptocurrency industry.