India has become the latest nation to announce the creation of a national digital currency. The digital rupee will launch in the fiscal year starting April 1, meaning India is well ahead of the pack in its digital currency development.
The world’s largest democracy also announced a new tax regime on existing digital currencies. Noting a “phenomenal increase in transactions in digital currencies,” India has decided on a 30% tax on their sale with a 1% tax at the source.
More about the new Indian digital rupee
While nations like the U.S. and the U.K. are still contemplating whether or not to release a central bank digital currency (CBDC), nations like China have already launched their e-CNY. The announcement that India will launch its digital rupee in April means it will be one of the first major economies in the world to do so.
India is far ahead of the pack, and this should not come as a surprise. The payment system in the country has already undergone a massive digital transformation. The United Payments Interface (UPI) allows instant real-time payments and is regulated by the Reserve Bank of India (RBI).
The launch of the digital rupee will only put India further out in front when it comes to fast, efficient payments. The Indian finance minister Nirmala Sitharaman said it would usher in cheaper, more efficient currency management. It’s understood that the RBI aims to implement the digital rupee rollout in phases. One of the chief aims is to lessen the nation’s high dependence on cash.
What about the new Indian digital currency taxes?
They’re interesting, and we can begin to understand the Indian government’s intentions toward digital currencies by analyzing the new taxes. Here’s what we know so far:
- All digital currency sales will be taxed at a rate of 30%.
- All digital currency transactions will be taxed 1% at the source.
- Gifts of digital currencies will be taxed. The tax will be levied on the recipient.
- Losses from the transfer of digital assets can’t be offset against other income.
From this, we can deduce a few things:
First, and most obviously, Indian tax collectors are determined to get their slice of the massive number of digital currency transactions and the capital gains on trading them. However, some have speculated that Indians will simply move to trading platforms in other jurisdictions. We’ll see how the Indian government plans to counter this. Perhaps they’ll ban Indians from using foreign trading platforms that don’t implement the tax?
Second, the 1% tax at the source is a clear disincentive to use digital currencies at all. It’s no coincidence that this is happening at the same time as a national digital currency rollout. We should expect to see more of this as other nations phase in theirs.
Third, it’s finally clear that India won’t be banning digital currencies (for now). It has contemplated doing so in the past, but it has obviously calculated that it’s more profitable to tax them instead.
It’s clear to see that Indian authorities are incentivizing the use of their digital rupee and discouraging transactions in other digital currencies. It will be interesting to learn more details on how this tax will be levied and enforced. From past statements, we can see that the Indian central bank is not a fan of digital currencies; they’ve repeatedly warned Indians about money laundering, terrorist financing, and the risks associated with price volatility.
Will CBDCs spell death for digital currencies like Bitcoin?
It’s unlikely that the rollout of CBDCs will mean the death of existing digital currencies like Bitcoin. Each country will handle them differently. We’ve already seen starkly contrasting examples of that, with China outright banning them and India opting for a softer approach by taxing them.
However, it’s clear that as more governments introduce digital national currencies, they will be keen to disincentivize the use of alternatives. Governments don’t like what they can’t control, especially when some private digital currencies are steeped in cultures with a strong anti-government and anti-tax sentiment. We can expect these currencies to be hit harder by governments (BTC and Monero come to mind), while those who play by the rules and have actual utility (BSV) will probably fare better in most countries.
National digital currencies will soon bring about many changes. Real-time and increased tax collection, faster settlement, seamless exchanges between currencies, the potential for ‘helicopter money’ to be given directly to the population in times of economic crisis or recessions are just some of the changes we can expect.
However, for now, at least, they’re unlikely to kill off digital currencies like Bitcoin. Sure, some governments will take a hardline approach, but open societies and democracies like India are more likely to take a softer-handed approach in alignment with the desires of the people. Digital currencies will be fine, but very soon, they’re going to have a lot of government-approved competition across the world.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
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