The Budget presented by Union Finance Minister Nirmala Sitharaman this year has two especially noteworthy announcements in the journey of India's deep digitisation.
As I have repeatedly argued in my columns published in The New Indian Express, India is going through a process of deep digitisation, and transforming itself into a digital-first economy by moving almost every aspect of its economy from taxation to retail and healthcare.
Two specific programmes announced in the Budget are worth highlighting. First is the taxation on 'digital assets', a phrase that includes everything from cryptocurrency speculation to NFTs (non-fungible tokens), and the other is the introduction of a digital currency.
The first was something many had thought could be on the cards, especially as all recent data showed heightened participation by Indians in the purchase and sale of cryptocurrencies and in creating and selling NFTs. In December 2021, the Finance Minister had commented that the sheer volume and scale of cryptocurrency speculation in India was not "healthy at all".
The Finance Minister declared in the Budget, "There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent. No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital asset cannot be set off against any other income. Further, in order to capture the transaction details, I also propose to provide for TDS (tax deducted at source) on payment made in relation to transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold. Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient."
A tax regime of 30 per cent plus 1 per cent is fairly stringent as a first step to curbing wild speculation in this space and demonstrates the direction in which the government is thinking. Also, by stating that "loss from transfer of virtual digital asset cannot be set off against any other income", potential leakage from the tax regime has been blocked.
At a time when everyone from Amitabh Bachchan to your friendly neighbourhood artist is seeking to sell NFTs -- some at very high prices -- the idea is to not leave open any arena where speculation might grow unchecked, and from where the government, which is spending unprecedented amounts in building infrastructure, could raise more revenues.
The second part of this story in the Budget this year is of course about India's upcoming digital currency, which will be issued by the Reserve Bank of India. This needs to be understood in context of the journey the Narendra Modi government has made in constantly pushing towards greater financial accountability and reduction of black money.
A great part of this programme is the push for digitisation. But simultaneously with the era of cryptocurrency dawning, there is a need for two interlinked things -- policy that clearly states where the government stands on digital assets and speculation, and new tools to address this market.
Having its own state-generated digital currency further promotes the goal of reducing cash dependency and allows for higher seigniorage due to lower transaction costs, and the reduction of settlement risks.
How all of this will pan out in terms of actual use of the digital currency, and the tracking of digital assets transactions to ensure proper and efficient taxes are levied as per law will be apparent in the next 24 months, but what these two proposals have ensured is that a broad framework of thinking on this issue has been put in place by the government.
Therefore, this constitutes the government rising in a sense to the digital challenge and addressing its two key current elements -- and bringing these under the watch of executive action. As India becomes more and more a digital-first country, such action would be needed to ensure that policy travels at the same speed as the ever-metamorphosing digital world.
Hindol Sengupta is Vice President & Head of Research at Invest India, GoI's national investment promotion agency. He can be reached at hindol.opinion@gmail.com.