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UPSC Current Affairs: Taxing cryptocurrency | Page No.09
UPSC Syllabus: Mains: GS Paper 3: Indian Economy
Sub Theme: Crypto assets | UPSC
Background:
– Cryptocurrencies are not illegal in India.Hence, if a person wants to buy cryptocurrencies and start trading, he can easily do so without any regulatory hurdles.Several cryptocurrency exchanges such as WazirX have come up in India where investors can buy and trade in cryptocurrencies.
– According to some estimates, as many as 10 crore Indians may already have investments exceeding a total of $10 million in them.
– The Government was supposed to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the recent winter session of the Parliament.Initially, the Government stated that under the provisions of this bill, private cryptocurrencies will be banned and in its place RBI will introduce official digital currency.
– According to some media reports, the Government may consider Cryptocurrencies as Crypto-assets and use the existing laws to tax transactions in cryptocurrencies.
Present Status on Taxation of Cryptocurrencies
Tax liability on Cryptocurrencies: Neither the GST Act nor the Income tax act have explicit provisions on taxing the cryptocurrency transactions.
However, we can apply the general provisions of the Income tax law and GST law to bring the cryptocurrencies under the tax bracket.In fact, some the Indian citizens have already started including the profits which have earned from trading in cryptocurrencies in their Income tax liabilities.
Present Tax Status: Under the Income tax act, individuals would have to consider the income earned all the sources to calculate his tax liability.This income should be shown under separate heads such as Income from salary, Income from Business, Income from capital gains, other sources of Income etc.
,2 purposes- Trading and Investment.Trading- Buying High Volume, high frequency and short term trading- Treated as Business Income
– Investment- Lower frequency, volume of trading lower- Capital Gains Tax.
– Trading- Higher frequency, volume of trading higher- Business income- GST.
– Mining of Cryptocurrencies- “Other sources of Income”.
Similarly, crypto exchanges in India such as WazirX, Coin Switch, Kuber, DCX etc.earn commission on the crypto transactions.
Required to pay GST rate of 18% on the transactions.
Challenges:
Absence of explicit tax provisions has led to ambiguity and uncertainty.For example, there is lack of consensus as to under which head should be tax be paid in case of newly mined cryptocurrency.Should it placed under CGT or Business Income or Other sources of Income?.Lack of clarity as to whether the GST on crypto transactions is applicable only on Rupee transactions alone or even on transactions through crypto currencies.
Difficult to impose tax due to cross-border transactions: Usually, taxpayers may cryptocurrencies and store in online wallets, on servers outside India.In such cases, it becomes difficult to pinpoint which jurisdiction’s tax laws would become applicable and what kind of tax treatment would be effected especially in light of various nations having differing tax treatment for crypto assets including imposition of a general ban on them.
Anonymous transactions: The identities of taxpayers who transact with cryptocurrencies remain anonymous and hence it becomes quite difficult to keep a tab on the individuals who are trading in cryptocurrencies.Usually, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.
Difficult to track down on tax evaders: One of the most efficient enforcement tools in the hands of Income Tax Department is CASS or ‘computer aided scrutiny selection’ of assessments, where returns of taxpayers are selected inter alia based on information gathered from third party intermediaries such as banks.
However, crypto-market intermediaries like the exchanges, wallet providers, network operators, miners, administrators are unregulated and collecting information from them is very difficult.Another consequence of this lack of information is that the tax authorities are left with hardly any tools to verify any crypto transactions which do get reported.They are instead forced to fully depend on the data provided by the taxpayers.
Way Forward
Explicit and Unambiguous provisions should be incorporated in the Income tax act.These could include provision of a definition for crypto assets for tax purposes and guidelines addressing the major taxable events and income forms associated with virtual currencies.
Mandatory Disclosure requirements: The US government has made it mandatory for all tax payers and third party intermediaries (Exchanges, wallet providers, miners etc) to disclose all the cryptocurrency related transactions.
This is done to ensure that crypto transactions do not go unreported and crack down on tax evasion.Such a mandatory disclosure requirements should also be incorporated in India.
Facilitate exchange of information: The existing international legal framework for exchange of information should be strengthened to enable collecting and sharing of information on crypto transactions.This will go a long way in linking the digital profiles of cryptocurrency holders with their real identities.
Training to Tax officers: The Government must impart training to its officers in blockchain technology.In this regard, it may be noted that the United Nations Office on Drugs and Crime’s ‘Cybercrime and Anti-Money Laundering’ Section (UNODC CMLS) has developed a unique cryptocurrency training module, which can aid in equipping tax officers with requisite understanding of the underlying technologies.
UPSC Current Affairs: Web 3.0 – the future of internet | Page No.
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UPSC Syllabus: Mains: S&T | Polity & Governance
Sub Theme: Web 3.0 | UPSC
Web 3.0 has emerged as a new tech buzzword.The term incorporates a bunch of next-gen ideas, all pointing towards elimination of the dominance of the big tech companies over the internet.
Some see Web 3.0 as the future of the internet, while some caution against being overtly optimistic about what it can potentially deliver.
What is Web 3.0?
Web 3.0 is the next version of the internet, where services will run on blockchain.It is a decentralised internet that runs on a public blockchain, which is also used for cryptocurrency transactions.
It will be permissionless and democratic.For instance: Twitter will not be able to censor posts and Facebook will not be able to maintain a database of billions of users that can be potentially used to influence elections.
In a Web 3.0 universe, people will control their own data and will be able to move around from social media to email to shopping using a single personalized account, creating a public record on the blockchain of all of that activity.
All data will be interconnected in a decentralized way, unlike the current generation of the internet (Web 2.0), where data is mostly stored in centralized repositories.
– Three key features of Web 3.0 are: Ubiquity, Semantic Web, Artificial Intelligence and 3D Graphics.
– Examples of Web 3.0: The most recent example of Web 3.0 are the NFTs or non-fungible tokens.
Evolution of the World Wide Web
Tim Berners-Lee, the inventor of the World Wide Web, intended that the internet would be a collaborative medium, a place where all meet and read and write.
But the current situation is entirely opposite, with big tech companies acting as gatekeepers to all that’s on the World Wide Web (W3).
Here’s how the W3 evolved to this point:
– Web 1.0 [1990 – 2000]: It is regarded as the first generation of the World Wide Web.
Also known as the Syntactic web or Read only web.Mostly, Web 1.0 was limited to searching the info and reading what’s already there.
There was very little in the way of user interaction or content contribution.It was pretty disorganized and overwhelming, and soon it came to be dominated by AOL, Compuserve, early Yahoo and other portals.These online service providers were the gateway to Web 1.0.
– Web 2.0 [from mid-2000s]: This phase was characterised by enhanced user experience and made the W3 interactive.Also known as Social Web or read-write web.It enabled users to participate in content creation on social networks, blogs, sharing sites and more.Search engines (Google) and social media platforms (Facebook, Twitter) driven by user-generated content disrupted the media, advertising and retail industries.
Web 2.0’s business model relies on user participation to create fresh content and the resultant data being sold to third parties for marketing purposes.
– Web 3.0 [yet to arrive]: It is the next stage of the web evolution.It would make the internet more intelligent, or process information with near-human-like intelligence through the power of AI systems.
Why we need Web 3.0?
Loss of privacy: Presently, a huge amount of data is generated when consumers search, shop or upload videos and pictures.All this data is stored in the servers of the companies that the people interact with.This means that intermediaries become custodians of user data and profit from it via advertising.
For such companies, the more time consumers spend creating content, the more data the company can collect, helping it to improve its AI algorithm and its advertising engine, a key revenue model for the company.
This gives rise to issues of privacy, wherein user data is shared for profit without their consent.
Data ownership: Presently, only centralized repositories are the ones that own user data and profit from it.In Web 3.0, users can own and be properly compensated for their time and data.
Plagiarism: Plagiarism is widespread online.
It’s very easy to copy original content and build a following around it on social media.Those who copy content get compensated way more than the original content creator.
Plagiarism makes it harder for creators to get adequately compensated.Web3 might help address that issue.The transparent nature of blockchain makes it easy for anyone to track the originator of content.
What are the key differences between Web 2.0 and Web 3.0?
Any information that users share on Web 2.0 is stored with a cloud service provider used by an online service, whether it is food delivery or e-commerce, whereas in Web3, all services are built on top of a blockchain.
Cloud is controlled by giants such as Amazon, Google and Microsoft, and is centralised.In the case of blockchain, data is distributed across networks and no single entity owns the information.
Are Metaverse and Web 3.0 interrelated?
No.
Both are not correlated.The metaverse is about creating digital avatars and interacting with others in virtual spaces, be it offices or arcades.It does not have to be on a blockchain.
The whole point of Web 3.0 is decentralisation.
What are the implications of Web 3.0?
Choice over personal data: In Web 3.0, instead of data residing in the centralised databases of big companies, it is going to reside on the blockchain technology which is not controlled by one organisation.And with that, a person’s data becomes their choice, and which advertiser they want to give it to.
Impact on big tech companies: Web 3.0 adoption will force the big tech companies to rethink their core business models and become more community-owned and driven.The big tech firms are already experimenting with different aspects of this new technology.
New regulatory environment: Regulation of Web 3.0 requires a new regulatory thinking.Authoritarian govts might seek to capture the new technology while eliminating private competition.For instance, China began researching digital money in 2014.It plans to force its exclusive use at the cost of privacy, freedom, and political dissent.
While some countries may seek to force Web 3.0 innovations into compliance with familiar legal structures.
For instance: India is also looking at regulating cryptocurrencies under SEBI.
Where is India in Web 3.0?
The idea is fairly new to India and will take time to develop.
– Indian TikTok rival Chingari recently shifted from a Web 2.0 model of incentives for content creators to a Web 3.0 model.The start-up raised over $19 million in October 2021, that will help it build its token called ‘$GARI’ on the Solana blockchain.
– A range of Indian start-ups like Biconomy, Polygon, EPNS, Persistence, and Vauld are working to put together the technological building blocks to make Web 3.0’s mass adoption a reality.Polygon, crossed a market capitalisation of $10 billion recently.
By one estimate, Web 3.0 can help India contribute an additional $1.1 trillion of economic growth to its GDP over the next 11 years.
What is the way forward for India?
Web 3.0 will not be perfect.Risks such as capture of communities by specific groups, inadequate grievance redressal, misuse for illegal activities, and entry of fraudulent actors may emerge.
It is, therefore, necessary for the governments to act.
This means that Govt must acknowledge the potential of web 3.0 in empowering startups, small digital businesses, and consumers, and creating an enabling environment to help realize such potential.
It also means reaching out, listening, and genuinely engaging with stakeholders to understand the potential, risks and challenges of web 3.0.
Ministry of Electronics and Information Technology (MeitY) can lay down overarching principles for governing 3.0, with a focus on self and co-regulation.Knee-jerk reactions such as outright bans should be avoided, and nuanced risk-based regulations will be essential.
Through such principle-based governance, the Govt can transform India into a hub for development of web 3.0 ecosystem and grab the first mover advantage.
