The Union Budget of 2022 marked a significant milestone by acknowledging cryptocurrencies as a distinct asset class for the first time. However, it also introduced new tax regulations affecting crypto transactions. These regulations include a high 1% Tax Deducted at Source (TDS) on the transfer of Virtual Digital Assets (VDAs), a flat 30% tax on gains, and the disallowance of offsetting and carrying forward losses. 

Unfortunately, these measures have led to unintended consequences for India's growing Web3 sector. Studies show that many Indian users of VDAs are now turning to non-compliant offshore exchanges, risking their investments and operating outside government oversight. This shift could also potentially hinder anti-money laundering and counter-terrorism financing efforts.

The upcoming interim Budget presents an opportunity for the government to strike a balance between regulating the VDA sector and supporting its growth. Adjusting the TDS rate, even to as low as 0.01%, could still achieve the goal of tracking VDA transactions, especially since all such transactions are now covered by the Prevention of Money Laundering Act since March 2023. Many Indian exchanges, like CoinSwitch, are already registered with the Financial Intelligence Unit to comply with anti-money laundering and counter-terrorist financing rules.

In addition to lowering the TDS rate, the government should consider allowing the offsetting of VDA losses with gains and treating VDA income similarly to other capital assets. 

With over 80% of the G20 countries and major financial centers providing clearer regulations on crypto, India should follow suit to maintain its leadership position and recognize the growing momentum for crypto assets. Establishing a robust regulatory framework for VDAs in the upcoming Budget, alongside a favorable tax regime, will encourage responsible innovation, protect consumers, and position India as a global hub for Web3 activity. This, in turn, can contribute to achieving the country's $5 trillion economy goals by 2027-28.