Crypto assets are subject to a tax in the budget.

Crypto assets are subject to a tax in the budget.

The triple whammy of the Union Budget – 30% capital gains tax, 1% tax deductible at source (TDS), and the inability to offset or even carry forward losses – puts a dark shadow over this promising sector.

Of course, moving from a 10-year prison sentence and a Rs 25 crore punishment in the 2018 Bill to a regular tax system is a huge relief. So, while this acknowledgment is a positive thing in general, the way the taxes have been proposed suggests that the government has rushed into this decision. This could result in the loss of new prospects and industry participants in this arena, which global leaders like Jack Dorsey and Elon Musk are pursuing vigorously.

More importantly, any tax policy must be equitable to the country’s citizens and encourage them to report their assets accurately. Given the small number of taxpayers and the availability of good tax advisors, a flat rate of 30% may encourage people to find ways to circumvent these onerous tax regulations. Because most investors in the market have holdings of between Rs 5,000 and Rs 1 lakh, a tax rate of 10-15% would have been preferable. Few people put in more than that. A easy solution would have been to employ the existing tax slabs based on income levels.

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Implementation difficulties

For example, not all of the ideas in the Union Budget will go into effect on April 1, 2022. Some will begin on July 1, 2022, while others will begin in April 2023. Another major point is that acquisition costs have not been included for existing crypto miners or future business opportunities, such as ‘Nodes as a Service,’ which is a huge potential market for the industry. ‘Nodes as a service’ usually include an API key that can be used to write to and read from the blockchain. This is a significant omission because India is regarded as a global IT manufacturer due to its vast talent pool and infrastructure. It has the potential to become a “multi-billion dollar” market if properly regulated. We are currently at a fork in the road that could result in a tremendous opportunity loss, potentially changing the fate of its people and the country. Such tight standards and anomalies are a clear’red flag’ for global corporations and exchanges.

Another alarming detail is that any income received by a trust will be taxed at a rate of 30%. Not to mention that one of India’s largest crypto-led charity campaigns, focusing on Covid, raised hundreds of millions of dollars in a couple of weeks (cryptorelief.in). A 30% tax on philanthropy will also discourage it. What’s disappointing is that although start-ups are exempt from paying taxes, cryptocurrencies, which will be at the forefront of the Web 3.0 ecosystem, are severely taxed. To be honest, discouraging newcomers isn’t going to propel India to new heights. It will instead encourage them to leave for the advantage of other countries.

There’s a reason Facebook dubbed itself Meta (Metaverse – Web 3.0), and Jack Dorsey is developing Blue Sky, a new decentralised social media network. Dorsey also left Twitter to work on a cryptocurrency startup (Square). These forward-thinking entrepreneurs have identified the ecosystem’s potential and have taken the initial steps toward realising it. The crypto ecosystem in India should be governed with a more favourable tax and regulatory framework; we have a chance, and we must seize it.

Before filing an ITR, there are a few things to keep in mind.

Jobs and opportunity are being lost.

Consider the following: We received inquiries from one of the main crypto exchanges interested in India shortly before the Union Budget. Their ambitions appear to have been put on hold for the time being. And it’s not simply because of the taxation issue, which is already troublesome.

Because of the intricacy of cryptocurrencies, it appears that the government has taken the easy way out. However, because to its large population, India is a great potential market for cryptocurrency. However, compliance with the Goods and Services Tax (GST), TDS compliance, and a high tax rate make it appear exceedingly difficult for international entities and exchanges to set up shop in India and generate significant employment and direct investment. Around 10,000 young Indians are currently employed by Indian exchanges and crypto-focused enterprises. Furthermore, Indian coders are being offered a plethora of freelance possibilities from all over the world. Another round of brain drain from our country will result as a result of this.

Union Budget 2022 and GST

Union Budget 2022 and GST

For taxpayers, it’s been a mixed bag.

The Budget’s GST provisions should be dissected in two parts: the Finance Minister’s speech and the proposed revisions to GST laws.

The contrast between the two is striking: the Budget speech waxes poetic about how GST has been a success, yet the amendments continue to place new constraints on taking use of input tax credits and filing returns. In an unusual event, the Finance Minister strayed from the script and revealed extempore that GST returns for January 2022 totaled $140,000 crore, a new high.

When you consider that a large percentage of taxpayers were either sick or recovering from Omicron in January 2022, the figure appears to be excessive. Artificial limits on input tax credit (requiring taxpayers to claim credit only for input invoices that appear in GSTR 2B) and aggressive tax collection by the Department (pay now, pay later) have undoubtedly contributed to the Department’s record revenue collections.

These figures are likely to have encouraged the Finance Minister to predict a nearly 16 percent increase in GST in the Budget Estimates for 2022-23, bringing the total to $660,000 crore. Budget projections for 2022-23 should be confronted with an even heavier dose of the same medicine: limits and severe assessments. Many taxpayers and their advisers who contact the Department on a regular basis would disagree with the fact that GST regulations have now become progressive and totally IT-driven, as stated in the Budget address.

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The Modifications

The proposed GST modifications are a mixed bag of good and unfavourable measures. If taxpayers do not file their returns for three months, they risk losing their registration (Section 29).

The expansion of the time limit for issuing credit notes from September to November of the financial year is one of the advantageous clauses. While taxpayers would have applauded this provision, their sole query would have been, “Why not December?” Similarly, the deadlines for correcting errors in return filing have been extended until November.

When GST was first established, the “matching concept” was offered, but it never really took off. By altering the parts that required a two-way dialogue procedure, Budget 2023 nips this in the bud. In other words, taxpayers can only claim input tax credit on invoices that are both in their books of account and automatically populate GSTR 2B. Budgets have virtually become accustomed to include measures that have retroactive effect.

How much does it cost to file an amended income tax return?

The Tax Department has been displaying and attempting to explain Section 50(3) of the CGST Act, which imposes a 24 percent interest penalty for any unreasonable or excessive claim of input tax credit. The Section has also generated some substantial revenue. The Budget, hoping for a windfall, makes the Section effective on July 1, 2017. They also ensured that the SGST and UTGST Acts were amended in the same way. Late fees will be charged if returns are not filed on time.

In terms of GST modifications, annual budgets are not intended to make substantial announcements – that is the work of the GST Council. With Council sessions becoming increasingly rare, annual budgets might be utilised to introduce urgent revisions.

Budget 2023 lost a trick by not taking a page from the Direct Taxes provisions in the same Budget in terms of decreasing litigation and applying it to GST. Different jurisdictional authorities for Advance Rulings (AARs) on the same GST query have offered opposing opinions. Budget 2023 may have included a mechanism to address this problem. Taking more and giving less could become a common theme in annual budgets.

To improve GST compliance, the CBIC will increase departmental audits.

To improve GST compliance, the CBIC will increase departmental audits.

Chairman Vivek Johri of the Central Board of Indirect Taxes and Customs (CBIC) said in an interview that the board plans to increase scrutiny and departmental audits of risky taxpayers to enhance GST collections while leveraging data and technology to guarantee that staff make transparent judgments.

More services, such as electric car charging stations and service centres, might become sources of GST revenue, while a focus on tax compliance in domestic transactions and a larger tax base compensate for the reduced use of fossil fuels for revenue collection.

In an interview, the CBIC chairman stated that the department’s compliance improvement measures are already apparent in GST collections, and that there is room for revenue growth by implementing further GST procedures.

He claimed that CBIC was already concentrating on them.

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“Aside from ensuring that those who enter the tax base file returns and pay their taxes, what we need to look at now—and we have already begun because it is an important part of any tax administration—is the need to thoroughly scrutinise the returns to ensure that the data submitted is accurate and compares favourably with the financials reported by the business.” “We’ll deal with it through examination and audit,” Johri added.

These are the two pillars of CBIC’s compliance management strategy, he stated. States are focused on it as well, he said.

CBIC now conducts scrutiny and departmental audits based on various red flag reports generated by the system due to inconsistencies. The current focus is on making the scrutiny and departmental audit cases more methodical and structured around risk metrics.

“We’re also putting out the procedures for doing that examination.” That is, what are the checks that must be performed for a specific sort of risk, and we will inform the field officer. Similarly, we will choose cases for audit,” Johri explained.

Scrutiny differs from audit in that an audit examines assessees’ financials to determine if they match what is declared in the GST return.

Budget 2022 revealed new income tax reforms.

“It goes without saying that it will be technology-driven in this day and age,” Johri said, adding that the process will be data-driven and automated so that officers conducting inspection have transparent inputs on what they need to verify in the tax returns and what the potential risk areas are.

Departmental audits existed in the old excise duty and services tax systems, as well as the GST regime, but the focus currently is on leveraging the tax authority’s considerable data and IT expertise to make it more robust in order to broaden the revenue base.

Anti-evasion measures implemented by the federal and state governments have already improved GST collections. With state GST compensation ending in June, state administrations are also eager to employ compliance-enhancing measures.