Beyond the vocal – and visible - retail-facing crypto trading exchanges in India, there is a thriving local blockchain ecosystem valued in excess of $15 billion. But it must hurdle potential barriers to growth in the shape of newly prescribed taxes that, some others believe, is more help than hindrance to this perception-challenged sector.

The 30% tax (and TDS) on crypto income announced in the Budget is seen by some as “recognition” of the blockchain industry. But many others also believe a high tax regime and stringent taxation terms could stunt growth in a sector populated largely by bootstrapped start-ups.

“A high tax rate is very discouraging… it’s also a growth deterrent,” said Sidharth Sogani, founder - CEO, Crebaco, a rating agency for digital currencies and businesses that work with them. “Higher tax incidence reduces the scope for all players in the ecosystem; the crypto world is not just about exchanges that facilitate trading or investments.”

Developers of decentralized applications (DApps) and DeFi protocols, raters, wallets, blockchain-focused venture funds, crypto asset managers, distributed ledger tech companies, crypto-gaming & GameFi app makers and blockchain-linked Web 3.0 players form a large part of the $15-billion cohort.

“There are players that are trying to build other use-cases on the blockchain,” said Sogani.

According to Crebaco, the $15-billion Indian blockchain industry employs nearly 10,000 people currently.

“If your taxation is unfriendly, companies will move out of the country. This space is global in nature, and it is internet-based; travelling between countries is also easy now,” Sogani added. “Entrepreneurs and skilled engineers and coders may simply relocate to a tax-friendly destination such as Singapore or Dubai.”

The problem begins right at the outset. Most blockchain companies reward their employees (engineers, coders or developers) by offering tokens or cryptos as part of the compensation packages. That part of the remuneration paid in digital currencies (or tokens) will be seen as a ‘gift’ under the new tax regime, and be charged a flat 30%. That apart, higher tax on crypto incomes would also hurt traders and market-makers, a relaxation considered a must for the growth of the industry.

“Trading volumes will come down across exchanges because of high tax incidence. This will indirectly bring down tax revenues of the government,” said Darshan Bathija, CEO of Vauld, a crypto-lending & trading platform.

“The TDS is going to hurt the industry the most; every time a player pays TDS, it goes from his immediate working capital. The decision to tax crypto incomes is a positive step, but it should not be so high; such high levels of taxation may not help the ecosystem to grow,” Bathija said.

Countries such as Singapore, Malaysia, Germany, Portugal and Dubai have taken friendlier approaches to crypto investors and blockchain businesses. Many have issued licences to players in this space – bound by tight regulations. The tax rate (on crypto incomes) in several of these countries ranges from 2% to 15%.

Apart from a higher tax rate, curbs on setting-off losses, or carrying them forward (to next year), have not gone down well with a section of the industry.

“Higher taxation will be a hurdle for businesses in the short term, but over a longer period of time, this may get adjusted to the overall costing,” said Ankitt Gaur, founder-CEO, EasyFi Network, a blockchain-based lending protocol for digital assets.

Or, a booster dose?
To be sure, taxation has helped remove the taboos and negative perception around blockchain businesses, Gaur said. He was also quick to point out that not all blockchain businesses need cryptos to operate.

“The decision to tax crypto incomes may act as a catalyst for the ecosystem to grow. We’ll see a lot of Web 3.0 businesses coming up in India over the next few years; there will be several blockchain-based applications targeting the BFSI sector too,” added Gaur. “The use of cryptos on the blockchain is very use-specific.”

Jagdish Pandya, chairman of BlockOn Capital (a blockchain-focused VC fund), concurred with Gaur.

“The tax level is very high, but we should see it as a positive step… The ecosystem will grow at a faster clip now, as there is more clarity. Venture investors will throng to invest in Indian blockchain businesses,” Pandya added.

Asset managers and exchanges are not quite pleased as high tax incidence makes it difficult for them to attract new crypto investors. Estimates suggest there are 15 to 20 million crypto investors in India, with total holdings of around Rs 40,000 crore.

'Safety of retail investors'
“High taxation is imposed to remove small retail investors from this market. It is more of a deterrent to keep smaller investors safe,” said Sachin Jain, founding partner at Amesten Capital, which runs a ‘portfolio management service’ for investors in cryptocurrencies.

“No one is happy paying a 30% tax; but we’re finding solace - knowing that the government is not entirely against this sector. The problem with high taxation is that entrepreneurs will relocate to tax-friendly countries the minute their business volumes grow,” he added.

Many leading blockchain businesses (including crypto exchanges) have already opened offices in tax-friendly destinations - to shift their operations, if the need arises. These offices were opened when rumours of a complete crypto ban flew thick and fast a year ago.

“The government has just introduced a tax; they’ve not put in place any regulations. Taxation is agnostic on legality,” said Jay Sayta, a Mumbai-based lawyer specialising in technology laws.

“The government may decide on regulations (or ‘legality issues’) after considering tax revenues collected via this source this year. If the government decides to ban cryptos to protect its own CBDC (as China did), it may give sufficient window for investors to square-off their positions,” Sayta added ..

But that would be a heart-break for many who believe in the power of hash and codes.