Thursday, Jun 30, 2022

Cryptocurrency Can Be Banned, Regulated Or Just Taxed, Says Finance Secretary

After finance minister Nirmala Sitharaman announced cryptocurrencies as assets to be taxed at 30 per cent, her finance secretary T.V. Somanathan clarifies that the government is still undecided about what to do with this emerging asset class but is certain that the government will earn revenue on it

T.V. Somanathan is the finance secretary in the Ministry of Finance.
T.V. Somanathan is the finance secretary in the Ministry of Finance. Suresh Kumar Pandey

Union finance secretary T.V. Somanathan has defended the rationale behind taxing cryptocurrencies, even when he thinks that the exact nature of a tax on them needs to be discussed further. He also says that the proposed committee on venture capital and the private investment sector has been created on the demand of the sector stakeholders. Among other issues mentioned in the Union budget, he says that the extra resources promised to states will be tied to the mandate of the PM Gati Shakti scheme. Edited excerpts below:

In the context of taxing of cryptocurrencies, there is a school of thought that says that anything under the ambit of taxation is, in essence, legal.

No. The income tax law clearly says that any illegal income is also taxable. For example, if an Indian Administrative Service officer takes a bribe, it is taxable. The smuggling income of a smuggler is taxable even if its nature is detected after the smuggler is caught. The income tax department will not know that the said officer has taken a bribe. If it is detected and the officer is prosecuted for corruption and their house raided, then the officer will be prosecuted for corruption separately. But equally, that income will get taxed.

Cryptocurrencies are not illegal until they are banned. While it is legal, it is taxable. Right now, there is ambiguity in its taxation because it is a new kind of asset. If I am dealing in a cryptocurrency, should it be taxed as business income? If I am a CoinSwitch Kuber, maybe my income is business income. But, if I am just an investor who buys once and sells after two years, it is capital gains. There is an ambiguity that is now being clarified.

Cryptocurrency and digital currencies have become popular in the last few years. Is the 30 per cent tax a way to discourage trading in the sector?

I do not think so. That is a separate approach where the government is considering wider consultations and international ramifications. Cryptocurrency does have a cross-border dimension. Should cryptocurrency be banned, regulated or remain unregulated and not banned?—all possibilities are open. It can be banned, it can be regulated or it can be left neither regulated nor banned but taxed. That is a separate discussion and [its outcome is] yet to be decided.

We were very keen that taxation could not be delayed or left ambiguous because there would be a lot of disputes. It is taxable, but when there is no specific provision, taxability is subject to interpretation and disputation. That goes away from April 1.

The budget announced an expert committee for VC and PE investments. What will be the contours and mandate of this committee?

The venture capital industry provides a lot of capital to many exciting and developmental ideas. Its members have been saying that there are regulatory issues among how AIFs [alternative investment funds], venture capital industry and listed companies are regulated. They include a set of mainly regulatory and, perhaps, some taxation issues. It is difficult to look at them through just a statement in the budget speech. The industry feels that a deeper examination will help in arriving at an acceptable solution both from the regulatory and the industry’s point of view. It is yet to be decided who the members of the committee will be, but it will be a broad-based committee where outside experts will definitely be involved.

Private sector Capex has been muted since the pre-pandemic times. Do you think the government Capex alone can make up for the jobs lost during the pandemic?

Government investment alone will not be enough, but the hope is that it will create a ripple effect. We were still in the middle of the twin balance sheet problem pre-Covid-19: bank and corporate balance sheets were not in good shape. The absence of corporate investment at that time had certain restraints. By the time those were set right, we were in the middle of Covid-19. Now, we are finally in a situation where— Inshallah—we will neither have Covid-19 nor the twin balance sheet problem. And, with a little bit of pump from the government, we may see a rejuvenation of private capital investment. We are hopeful.

The government made a key announcement in the budget that states will get help to address their resource crunch. How will it benefit states?

This will augment the overall financial resources of the states, because this is being given in addition to the normal fiscal deficit borrowing that is allowed to them, which is four per cent, including a 0.5 per cent conditional amount. This extra resource will be used exclusively for the capital expenditure of the states. The nature of that capital expenditure includes a component of the PM Gati Shakti-related projects of the state. Not of the Centre, mind you. The Gati Shakti scheme is nothing but a more integrated, coordinated approach to infrastructure development, like road and rail or rail and ports where the coordination has been poor. In the coordination process, maybe it is the state highway that needs to be improved. This extra resource can be used to accomplish it. It can also be used for states’ capital projects. There will be some reform linkages in some components, like one component could be linked to the modernisation of urban spaces and another to laying optical fibre. These parameters will be specifically built in the instructions that come, but states will benefit substantially from this.

The 5G telecom spectrum auction will happen in the next financial year. But the budget document does not seem to have incorporated receipts from telecom revenue.

We have made some projections, but that is an approximate value. Spectrum auctions are difficult to estimate. Notionally, it is there. But, if that figure is correct or wrong, I have no idea. It may change depending on what the price of the auction is. We have taken a figure that we feel will be achieved. That way, there is always the chance of over-achieving, which is a great thing [laughs].