On Feb. 1, 2022, the Indian crypto industry reacted like cheerleaders unsure if their team had scored a goal. Excited celebration, then skepticism; an expression that said, “What just happened?”

India’s Finance Minister Nirmala Sitharaman made two major crypto-related announcements while introducing the nation’s budget for the upcoming year.

First, the government intends to levy a 30% tax on any income generated from crypto transactions and a second tax of 1% at source on all transactions (TDS).

Second, India intends to introduce a digital rupee (a central bank digital currency, or CBDC) within the financial year, the first reference to a time frame.

The single biggest point of confusion for users as a result of the announcements is how crypto could be taxed and yet not be legal. The government has refrained from suggesting crypto was legal.

After presenting the budget, the finance minister held a media briefing where she said her agency is "collecting inputs on regulation for crypto assets....I don't wait till regulation comes in for taxing people who are making profits.”

In other words, the bill that gives crypto the ultimate legitimacy or makes it legal will take time to come but the government is not waiting for that to happen before taxing people.India is awaiting crypto-specific legislation to be introduced in the parliament, deliberated upon and then passed by both houses to establish whether crypto is legal, meaning it can be accepted as an everyday speculative asset or as anything but a legal tender or form of money to buy and sell anything.

Whether crypto is legal, how much citizens have to pay in taxes, whether crypto could still be banned and how non-fungible tokens (NFT) fit into India’s regulatory framework are just some of the questions the crypto-curious citizen wants answered.

CoinDesk spoke to more than 20 experts, including government officials, lawyers, policy experts, executives at exchanges and tax professionals, to find the most simple and accurate answers.

The biggest takeaway is that “now as an investor I will no longer go to jail as a holder of crypto,” said Edul Patel, CEO of Mudrex, a crypto asset management platform.

A Reuters report from December 2021 said the draft legislation regulating cryptocurrency includes a provision that those who “infringe the law could be subject to arrest without a warrant and being held without bail.”

An NDTV report added that “individuals and corporations violating government rules on crypto finance will face fines of up to Rs. 20 crore (US$2.7 million) and a jail term of 18 months.

India’s yet-to-be-introduced legislation could still impose jail terms or fines, but not for simply trading in crypto – they would only apply if one violates new tax rules that determine how much tax to pay: 30% tax on income from transfer, a tax of 1% at source on all transactions (or TDS, for Tax Deducted at Source). Two other conditions are that one cannot offset losses from a transfer of digital assets against any other income and that gifts will be taxed when it is in the hands of the recipient.

The finance minister's use of the phrase “virtual digital asset” in her speech earlier this month points to why many in the industry, and the media that cover it, are not saying crypto is legal.

The budget proposal defines virtual digital assets as “any information or code or number or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged.”

In plain English, that means “virtual digital asset” is the terminology the government is using for all cryptocurrencies and NFTs.

The word “digital” is used because cryptocurrencies or NFTs are a digital representation and not legal tender you can hold in your hand like a 100 rupee note.

The government had earlier mulled using the phrase “crypto-assets” to signify that cryptocurrencies are not legal tender and you cannot buy or sell things with them but instead they are held as an asset for investment purposes.

But the government appears to have settled for “virtual digital assets” in order to distance itself from the word “crypto.”

“This forces the interpreter to try to understand why the government used a different word, creating doubt and encouraging investor caution,” explained Shehnaz Ahmed, senior resident fellow and lead (fintech) at the Vidhi Centre for Legal Policy.

This terminology by the government is broad and covers all sorts of digital or crypto assets for the purpose of taxation. “Another point is that the term ‘virtual assets’ is also being used by the global body, [the] Financial Action Task Force, [and] because the government wants to be aligned with the global terminology,” said Ahmed.

When India announced its new proposed rules Binance tweeted that “crypto just became legal in India.”

In media interactions after the announcement, several government officials said the new proposals do not mean crypto is legal.

Finance Secretary T. V. Somanathan told Bloomberg that it is not illegal to buy or sell crypto in India.

News agency ANI quoted Somanathan as saying, "Bitcoin, ethereum or NFT will never become legal tender. Crypto-assets are assets whose value will be determined between two people. You can buy gold, diamonds, crypto, but that will not have the value authorized by the government."

Similarly, Revenue Secretary Tarun Bajaj explained it best in an interview by saying that the gains from cryptocurrencies were always taxable but the new rule will “bring certainty in taxation of cryptocurrencies.” Still, this new rule “does not convey anything on its legality which would come out once the bill (on regulating such assets) is introduced in Parliament.”“Just because it is taxed does not make it legal,” said Central Board of Direct Taxes (CBDT) Chairman JB Mohapatra.

Mohapatra also said the act of levying a tax should not be equated with conferring legitimacy to cryptocurrencies, according to Business Today. A senior lawyer, requesting anonymity because he has worked with the government on crypto regulations, said the government has taken a view that everything is taxable but not everything is permissible. Illegal products smuggled in are also taxed.

“If you smuggle and are caught, you are not only liable to pay the forfeiture of goods and the benefits but also penalty. They also charge tax on it,” the lawyer said.

When CoinDesk asked Binance about these explanations by government officials, a spokesperson referred CoinDesk to statements from the Reserve Bank of India and the budget speech.

“We look forward to supporting the government of India as their approach to digital assets continues to evolve," the spokesperson said.

Investors in crypto will owe a 30% tax on all transactions. Further, some investors might owe an additional 1% tax in certain circumstances. The 30% tax will apply every time any investor makes any capital gain. In contrast, the 1% tax will only apply in certain situations.

However, international transactions may be exempt because the government has not yet defined how taxes might work if the recipient is overseas.

If a crypto investor sends 100 rupees to an exchange and buys bitcoin with it and it doubles in value, the investor makes a 100 rupee gain. According to the now-announced tax rule, the investor will be charged 30% on the gain of 100 rupees. So, the investor will be left with 170 rupees.

The 1% tax TDS will be imposed on the sale value (in this case 200 rupees) at the time of the sale.

But whether tax deducted at the source will be charged or not depends on the amount investors trade on exchanges and who they are.

Individuals or entities with a net worth of under 50 lakh (roughly US$66,500) are taxed with the 1% TDS if they invest more than 10,000 rupees. Investors with less than 10,000 do not face this tax.Individuals face the 1% TDS above 50,000 rupees. Investors will be charged a 30% tax if they do anything with their crypto investment besides convert the crypto back to rupees in their bank account.

Exchanges are responsible for submitting TDS taxes to the government on a monthly basis, while the 30% tax is the responsibility of individuals and their chartered accountants.

The government has not yet determined how to implement the 1% tax when the buyer or recipient of a crypto transaction is located in another nation. This has left exchanges confused.

All crypto (or virtual digital asset) gains will be taxed effective April 1, 2023, and the 1% TDS will come into effect as of July 1.

However, on Feb. 3, the Central Board of Direct Taxes (CBDT) announced crypto transactions conducted between 2021 and April 2022 will also be subject to this new tax.

The old income tax law would still apply on crypto gains over the past decade.

“The flat 30% tax is unfair, especially to the investors who fall under lower income brackets.” said Anoush Bhasin, a crypto tax adviser and a founder of Quagmire Consulting.

Bhasin said implementing the 1% TDS would be difficult for retail transactions.

“The government should further clarify how on-chain transactions would be considered for this purpose,” Bhasin said.The government is treating crypto like all other forms of speculative income in India, which explains why it would face a 30% tax rate, the highest rate in India.

"If I take horse racing, that also attracts 30% tax. There is already 30% tax on any speculative transaction. So we have decided to tax crypto at the same rate. Crypto is a speculative transaction, so we are taxing it at a 30% rate," Finance Secretary Somanathan told ANI.

“The first principle (of the government) at play is ensuring that no earnings from virtual digital assets escape the tax net,” wrote Meghna Bal, a fellow at the Esya Centre and a consultant for Koan Advisory, a technology policy consulting firm, for the ThePrint.

Bal thinks a high tax rate has been used “as a disincentive” for low-income individuals and that the “tax deductible at source (TDS) mechanism has been used to understand the extent of activity” in the crypto market.

Across all exchanges, the 1% TDS is the biggest issue. They don’t know if the 1% TDS will be on every single transaction.

Their concern is if that is the case, then high-net-worth individuals will discontinue crypto trading in India.

“We need more clarity on the 1% TDS and the definition of transfers. Is this transfer from wallet to wallet or bank to wallet?” said a senior executive at a major exchange, wishing not to be named.

The executive said a “30% slab is fixed for virtual digital assets but the definition of virtual digital assets needs to be made clearer, and ideally it should be different for different use case scenarios.”

NFTs, decentralized finance and metaverse tokens should have different tax brackets because they might see different uses than just speculative trading, the executive said.

On Feb. 10, representatives of India’s exchanges met with senior policymakers at the Finance Ministry, seeking a review of both the 1% TDS and the 30% tax rate. The industry is preparing a formal proposal and is hoping the government accommodates the industry’s reconsideration request before the bill is passed in parliament.

The other concern some of the exchanges have is whether crypto will be banned after bringing everyone under the tax net. The concern is that if all crypto-related activities are brought under a tax regime, it may make it easier to ban these activities outright.

If or when the government introduces a crypto-specific bill in parliament and it is passed and becomes law, crypto will be seen as being legal.

Even after a crypto law is enacted, the fine print will determine whether all aspects of the cryptocurrency ecosystem will be legal or not.

The bill has already reportedly evolved from prohibiting all private cryptocurrencies to allowing cryptocurrencies to be used as an asset.Therefore, uncertainty around several aspects of the crypto ecosystem remains and will be determined by the law.

It is not clear when the government will introduce the bill. The finance minister, responsible for introducing the bill in parliament, has refused to announce a time frame, saying consultations are ongoing. Only the cryptocurrency issued by the Reserve Bank of India (India’s central bank) – i.e., the digital rupee – will be a legal currency or legal tender. In other words, you could buy groceries only with the digital rupee and not ether, bitcoin or any other cryptocurrency.

In an interview with CNBC TV 18, the finance minister explained how she is trying to draw a “distinction between privately generated crypto-assets and what can be digital currency,” while also maintaining that “we can’t define” what a crypto-asset is until consultations are done. That is when she would bring the bill to parliament.

Shehnaz Ahmed of the policy think tank Vidhi Legal fears that “not making a call on the regulatory aspect is not great for the crypto industry. If they don’t, they are allowing for the growth of a reckless market. Tax treatment is great but you seriously need to have regulation.”

Technically, yes.

“But it may be foolish to do that since the implementation of the ban would be impossible,” said Sidharth Sogani, the founder and CEO of cryptocurrency research organization Crebaco.

“A ban would only instigate black market and peer-to-peer transfers that are impossible to track and trace, resulting in a major tax revenue loss, too,” he said. Most indications suggest India’s crypto market is too big to ban. That’s partly why India has decided to tax it now.

CBDT Chairman Mohapatra has underlined that even if crypto trading is made illegal through legislation, the profits on trade will continue to be taxed.

According to experts, what is more likely is that every cryptocurrency other than the digital rupee (and maybe some of the most well-known currencies such as bitcoin and ether) will be banned from being used as legal tender. Investors could trade cryptocurrencies as assets or purchase NFTs, but not food or other goods.“I don’t think that the legal tender status will be conferred on something that is not backed by the central bank and RBI. So even bitcoin or any other popular currency will not be given the legal tender status,” said Shehnaz Ahmed from Vidhi.

On Feb. 14, T Rabi Shankar, the deputy governor of India’s central bank, reiterated the bank’s stance, saying that “banning cryptocurrency is perhaps the most advisable choice open to India.”

The likely interpretation of the new rule is that NFTs will be taxed almost like virtual digital assets.

CoinDesk has reported that the government may be seeking “to define just what is or is not a non-fungible token” and that in this new law it has “retained the power to say this is not an NFT.” In other words, the government has retained the power to exclude any NFT it chooses through a notification.

“This entire taxation structure is brutal and it will not last. They will have to ease it in the next two years, is my prediction, maybe even when they introduce the crypto bill,” said Crebaco’s Sogani.