When Finance Minister of India Nirmala Sitharaman presented the Union Budget 2022-23, one of her announcements was particularly striking – a flat 30 per cent tax on the income earned from the transfer of a virtual digital asset. In addition, Sitharaman also announced that a one per cent tax deducted at source (TDS) shall be levied on the payment made while transferring a virtual digital asset. Lastly, the gift of a virtual digital asset is also slated to be taxed at 30 per cent.
The announcement may have ushered in some cheers in the global crypto market as the world crypto market capitalisation and market volume shot up by 0.11 per cent and 41.18 per cent, respectively. Then what ensued was a slew of mixed opinions from different crypto experts. One argument was that by taxing crypto gains, the government formally moved toward recognition of this asset class; while others said that the tax rate is too high and might discourage prospective investors from investing in or using cryptocurrency. Cryptocurrency investors and traders are on the edge of their seats trying to navigate through the dense fog of legal ambiguity surrounding cryptocurrency in light of this proposed policy.
The Government of India and the Reserve Bank of India (RBI) have been firm in their objection to private cryptocurrency entering the formal financial system and the high 30 per cent tax on cryptocurrency gains reinforces their unwavering stance. They justify this stance by highlighting threats to macroeconomic stability due to the inherent volatility in cryptocurrencies, the high incidence of fraudulent activity in the crypto arena and the inability of RBI to regulate the supply of non-official virtual currencies in the country.
The RBI had issued a circular in 2018 (withdrawn following a Supreme Court judgment in 2020), which disallowed all RBI-regulated entities from providing services related to cryptocurrencies. Finance Secretary TV Somanathan also declared that "crypto will never be a legal tender" in India. Along similar lines, a draft Bill titled Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, created a scurry among crypto investors and enthusiasts since its premise lay in prohibiting mining, trade, issuance, selling, use and disposal of cryptocurrency in India.
Next, in the Parliament's Winter Session in 2021, The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was set to be introduced. However, this was put off as consultations spearheaded by the Finance Ministry are underway. One hopes decisions by the ministry will allay the nervousness of nearly over 10 crore crypto owners in India.
This isn't the first time that the idea of high tax bands was mulled over or imposed to curtail an activity that the government deems inappropriate. Paternalistic governance in the past has manifested itself in the form of 'sin goods' that attract a steep 'sin tax'. Goods classified as sin goods include tobacco products, gambling ventures and alcohol-related products and, the high tax rate is intended to deter people from associating with such endeavours since, in the government's eyes, it is detrimental to their own welfare. A quick look at the sin tax imposed on tobacco in India can help understand. As of 2019-20, legal cigarettes constituted only eight per cent of the total tobacco consumption in India and the remaining 92 per cent consumption share is captured by cheaper tobacco items like bidis, chewing tobacco, etc, and illegal cigarettes. From 1981-82 to 2019-20, there has been a 43 per cent decline in legal cigarette consumption and a simultaneous 75 per cent upswing in the consumption of other tobacco forms that includes illegal cigarettes. The Tobacco Institute of India (TII) substantiates this statistic by pointing to the high and inequitable tax slapped on cigarettes relative to the other tobacco goods produced in the unorganised sector. The tobacco taxation experience is an example of paternalistic governance worsening an existing problem. The government, in its effort to promote the welfare of Indians, imposed a steep tax that engendered the proliferation of illegal cigarette sales and bidis while enabling the government to accumulate tax revenue. However, sin taxes and the like have also proven to be beneficial elsewhere, at least in the initial stages. To illustrate in brief, when Mexico and Berkeley, California implemented a tax on aerated drinks in 2014 and 2015 respectively, an initial dip in consumer purchases was recorded. However, the exact estimates are pretty wide and, in some cases, even contested. Given the fluctuating effectiveness of high taxes when executed by different countries, using existing evidence to definitively comment on the feasibility and impact on cryptocurrency markets of the stiff 30 per cent tax is not possible. Maybe pure taxation to change behaviour isn't the best way to go. Maybe a wider horizon of thought and looking to related disciplines of study might possess relevant tools and ideas for an effective administration of taxing and policy in the present and the future.
The domain of cryptocurrency is a fascinating one to explore owing to the existence of many behavioural biases, concepts and forces. Besides, such insights might also help one glean into and speculate on the possible scenarios once the crypto tax comes into effect starting April 1, 2022. One of the first developments after the Budget announcement was a sudden spurt in user registrations on crypto platforms. WazirX recorded over a 50 per cent increment in sign-ups and Unocoin welcomed 2,000 new investors onto their platform compared to the previous day. At the very root, societal occurrences influence an individual's decisions as we humans are social beings. Richard Thaler and Cass Sunstein's Nudge and many other experiments have documented social conformity and herding behaviour. A light eater, when accompanied by a heavy eater, tends to eat beyond their usual quantity. When people perceive others littering the streets, they tend to follow suit. Before taking a test, when people are told that others did poorly, they tend to exhibit poor performance as well. In the crypto space too, herding is aplenty. When people were glued to their television screens on Budget Day attempting to absorb every detail of the post-Budget panel discussions, the insights provided by crypto experts about how the Indian government was finally acknowledging the presence of cryptocurrency was all that was needed to induce the spike in sign-ups.
Furthermore, later that day, when an excited Ms X revealed that she entered the world of crypto investing over afternoon tea with her friends at the nearby tea stall, they were also forced to consider, if not invest, in cryptocurrencies. In this closely intertwined age of social media, the fear of missing out is common. When we read about windfall gains that have made people instant bitcoin millionaires, our curiosity is piqued and we want to be a part of it too. When emotions outpace concrete information, the likelihood of making sub-optimal decisions is high. So, while reading about the 'Bitcoin Family' that toured the world in a van after liquidating their assets for bitcoin, if Mr Y purchased bitcoin due to joy, envy, thrill and excitement without reading the fine print of cryptocurrency investing, he has fallen prey to the affect heuristic. Additionally, growing up in a fast-paced dynamic world has programmed most of us to expect quick results and benefits, often ignoring long-term repercussions.
A formal term for this phenomenon is instant gratification. The prospect of making immediate money by investing in cryptocurrencies is so enticing that one might discount the high risk that is involved. One final note as the cryptocurrency wave continues to grip India, it has left some acquainted with crypto addiction. The constant need to keep checking the price movements has disturbed people's sleep patterns, concentration levels and the time spent with their loved ones. The volatility and the adrenaline-inducing thrill inherent in cryptocurrency markets is hard to overlook. With herd behaviour, the fear of missing out, the affect heuristic, instant gratification and addiction playing huge roles in the crypto sphere, will the 30 per cent tax truly reduce the heavy penetration of private cryptocurrencies in India? Will it simply add to the government's revenue, failing to deter people from investing? As the air around this issue is fraught with vagueness, the only option we have is to wait and watch.
Akshaya Balaji
(This article was first published in news9 on March 3, 2022, https://www.news9live.com/business/economy/tax-on-cryptocurrency-tax-as-a-weapon-for-behavioural-control-smacks-of-a-nanny-state-mindset-156906?infinitescroll=1 )
