By Anjan Roy
Nirmala Sitharaman in her fourth budget presented on Tuesday February1 has straightaway kicked off an agitated debate with her proposal for taxing profits on trading of digital assets.
Along with this proposal, the finance minister has also announced that the Reserve Bank of India will work towards issuing its own “central bank digital currency” (CBDC).
With these proposals and announcements, Sitharaman had yanked the union budget from its stodgy traditional moorings to the twenty-first century world of digital currencies, decentralised finance, and the whole strong of technology based currencies and financial transactions.
Sitharaman has said that the RBI CBDC would be on the basis of the blockchain technology and this would have important bearings on financial transactions.
For once, the users of the CBDC —or the official digital currency from the central bank— will leave a digital footprint of its use all along the translations chain. That would also mean the digital currency holding from RBI could be traced in all subsequent levels.
This brings India at the forefront of the digital currency regime where only a few countries have ventured so far. Most advanced in this sphere is China which had experimentally issued digital currencies to a set of Chinese last year. These people were given a digital wallet of the Chinese central bank’s official digital currency which they were expected to use for everyday transactions.
The Chinese Communist Party and the state had hoped to formally launch this official Chinese digital currency with the inauguration of the Beijing Winter Olympics. The Chinese hoped that a formal Chinese CBDC, far in advance over the United States, which is far away from doing anything similar, to drive the Chinese yuan as a global reserve currency.
However, the Chinese had to postpone the launch of this currency at the Winter Olympics because of the diplomatic squabbles over human rights abuse by China in its Uyghur province and the official boycott by the Western countries.
Chinese were evaluating the idea that all payments by those who were attending the Winter Olympics were required to make all payments with the Chinese CBDC. Arrangements were completed for the mechanism of issuing these currencies to the attendees.
But, because of the omicron spread and fresh extremely strict covid isolation norms, the Chinese have put back the launch of the Chinese CBDC.
People are not sure about the incidence of this tax. Will it be on profits on sale and purchase of the currently available digital currencies like Bitcoin, Ethereum and others.
Alternatively, there are rising trading on digital assets like NFTs (non-fungible tokens). That is, for example, there are digital art, which are owned by individuals and being sold in the digital assets markets. Indians are also buying and selling such NFTs which will now attract the 30% tax on trading of such assets.
NFTs are real time digital arts. Many artists are converting their artwork into digital formats and are offering these on digital auction platforms. The owners of these digital arts retain their ownership of the artwork and could go on buying and selling these.
One stark example could be when the London-based renowned publication, The Economist, auctioned one of its covers on a digital auction platform. The publication cover depicted a version of the famous picture of “Alice in Wonderland” on the decentralised digital-based financial market.
However, if there are trading profit on say on buying and sales of existing digital currencies, will that also come under the purview of the digital profits tax o 30%. ? That is a question.
A conventional currency for sure is an asset, but it is not traded as such, excepting when exchanging for other similar currencies. Currency traders profits or losses are taxed or allowed to be set off in case of losses.
There should not be any exception to the profits booked under the present regime when trading existing open market digital currencies.
The finance minister’s two proposals —tax on digital assets trading and issue of RBI’s CBDC— are aimed at the same objective.
The finance minister is seeking to discourage Indian entry into the existing private digital currencies and the tendencies to undertake major trading. Indian buyers were becoming increasingly active on the existing global private digital currencies. The trading volume as rising at the established digital currency exchanges.
For these, as long as the going is good, it is good fun. However, it also means with large volume trading the private players were contracting increasing obligations as well. A large scale loss could also mean payments obligations.
With the tax on digital assets trading, it is both the digital exchanges as well as those who are picking up digital currencies will feel discouraged. So, it is likely to have an adverse effect on the overall Indian investments and trading in the existing private digital currencies.
So the upshot will be that Indians migrations to existing digital assets and currencies will get a check.
On the other hand, India will be at the very forefront of the global transition to a digital currency which is altogether fundamentally altering the concept of a currency. From cowrie shells to the disembodied digital currencies is the story of evolution of one of the oldest institutions of an economy — the concept of money. (IPA Service)