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 activity has primarily been driven by investment, with the annual investment-to-GDP ratio rising from 31.6% before the pandemic to 33.7% in 2023. Morgan Stanley analysis suggests that the Indian stock market has become the fourth-largest stock market in the world and is expected to become the third-largest by 2030. 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. In per capita terms, India still hovers around 140th place globally, far below countries like China, Mexico, and South Africa.

2. Overview of the Basic Tax System in India

2.1 Indian Taxation System

The Indian tax system is established based on constitutional provisions. The power to levy taxes is primarily concentrated between the federal central government and the states, while local municipal governments are responsible for collecting a small number of tax types. 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, and so on. The Indian tax system is mainly managed by the Indian Revenue Service.

2.2 Corporate Income Tax

In India, enterprises are required to pay corporate income tax on their earnings. Resident enterprises refer to those that are registered in India and have their place of effective management located in India. Taxable income for income tax is divided into four categories: operating profits or earnings, property income, capital gains, and income from other sources.

The basic corporate income tax rate for domestic enterprises is 30%. Non-resident enterprises and their branches usually apply a corporate income tax rate of 40%. India offers various income tax incentives, including full or partial exemptions, reduced rates, refunds, accelerated depreciation, or special deductions.

2.3 personal income tax

Residents of India are required to pay taxes on their income worldwide. Non-residents of India only need to pay taxes on income earned in India and on income received, arising, or accrued in India. In India, income is taxed according to a progressive system. The individual income tax for residents follows a classified comprehensive tax system and implements progressive tax rates.

2.4 Goods and Services Tax

Since July 1, 2017, India has implemented the Goods and Services Tax (GST)) reform. The Goods and Services Tax is a comprehensive tax levied on the supply of all goods and services, similar to value-added tax. Currently, there are four basic tax rates for the Goods and Services Tax, namely 5%, 12%, 18%, and 28%.

3. India's encryption asset taxation system

3.1 Overview of India Encryption Tax

The Indian Income Tax Department has introduced Section 2(47A) in the Income Tax Act, defining virtual digital assets (VDA). Starting from April 1, 2022, a tax rate of 30% is imposed on profits earned from trading encryption currency. Additionally, if crypto transactions exceed RS50,000 within a fiscal year, a 1% Tax Deducted at Source (TDS) is levied on the transfer of crypto assets.

3.2 Specific applicability of encryption tax

When selling cryptocurrency for fiat currency, engaging in encrypted transactions using cryptocurrency, or using cryptocurrency to pay for goods and services, a 30% encryption tax is required. In certain cases, such as receiving cryptocurrency gifts or mining cryptocurrency, taxes will be paid according to individual income tax brackets.

3.3 Source Deduction Tax (TDS)

Investors are required to pay a 1% source deduction tax for the transfer of encryption assets. TDS applies to transactions after July 1, 2022. When trading on Indian exchanges, TDS will be deducted by the exchange and paid to the government.

3.4 Tax regulations related to loss and theft

It is prohibited to use losses from encryption to offset gains from encryption or any other gains or income. Indian investors cannot claim expenses related to encryption unless it is the acquisition cost/purchase price of the asset.

4. Overview of India's Encryption Asset Regulatory System

The Indian cryptocurrency industry is going through a period filled with uncertainty, lacking a comprehensive regulatory framework at the national level. The Indian cryptocurrency bill is seen as a potential game changer, but after years of deliberation, its contents remain unclear.

In light of top-down regulatory challenges, support for self-regulation within India's encryption industry is increasing. Some Indian encryption exchanges have implemented strict KYC procedures and are collaborating with law enforcement to prevent illegal activities.

In 2024, Binance announced that it successfully registered as a reporting entity in India, marking an important turning point in the country's encryption currency regulatory landscape.

5. Summary and Outlook of India's Encryption Asset Taxation and Regulatory Framework

Although India has not yet established a comprehensive regulatory framework for encryption assets, it has implemented preliminary management through taxation measures. Looking ahead, 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 for the sustainable and healthy development of India's encryption asset ecosystem.