Other BriefingsRegulatory Ambiguity, High Tax Forcing Virtual Asset Sector Out of India to Dubai
As regulatory ambiguity, high tax rates, and bureaucratic hurdles discourage entrepreneurs and investors in the Indian virtual asset sector, Dubai is offering a safe haven with its facilitative policies, Web 3.0 ecosystem, equitable tax rates, and growing user base.
India’s wavering and ambiguous stance on the legality of cryptocurrency in India, coupled with a high 30 percent taxation rate, is forcing thousands of developers, investors, and entrepreneurs from the Indian virtual asset sector, including Web 3.0 and crypto entrepreneurs, to leave India for friendlier jurisdictions like the UAE, US, etc.
Reportedly, since November 2021, India’s Web 3.0 entrepreneurs – who leverage machine learning, artificial intelligence, and blockchain technology to achieve real-world human communication – have started registering their businesses in Dubai, Singapore, British Virgin Islands, and Estonia.
As per recent reports, the Indian cryptocurrency exchange, WazirX, which has clocked an impressive user base of 10 million in India, is also moving base to Dubai. The reports come as WazirX founders Nischal Shetty and Siddharth Menon have relocated to Dubai. Crypto experts estimate that between 30 and 50 Indian crypto entrepreneurs are running their blockchain and crypto startups out of Dubai.
Why are crypto entrepreneurs moving out of India?
Investors note that apart from regulatory uncertainty, the difficulty in doing business is a primary reason why Web 3.0 entrepreneurs and developers prefer relocating to more favorable jurisdictions. Bureaucratic hurdles, red tape, and official restraints like freezing of bank accounts, etc. are discouraging.
Starting from the 2018 Reserve Bank of India (RBI) circular banning cryptocurrency to the latest government statement expressing uncertainty about its legality despite the new taxation rules, the Indian government’s policy flip-flops have left Indian investors confused and agitated.
Moreover, an unfavorable tax regime, taxing all virtual digital assets – including crypto assets at 30 percent – have added to their woes. Additionally, other taxation norms like one percent TDS (tax deducted on source) on transfers, no basic exemptions, no set-off on losses, no indexation benefits irrespective of the holding period, and taxation of gifts, have made India an unfavorable destination for the digital asset industry in India.
Stakeholders have repeatedly flagged these tax provisions as aggressive, regressive, and detrimental to investor sentiment. They have also expressed concern about the imminent “brain drain” of the crypto industry out of India. India, which has a crypto user base of 105 million – 7.90 percent of the total population, stands to lose from this policy stance.
As per data from crypto research and intelligence business CREBACO, Indian crypto investments surged to over US$10 billion in 2021 and if the outmigration trend continues, India will miss out on the opportunity of becoming a crypto hub, hosting one of the largest user bases in the world.
Why is Dubai emerging as the choice of destination for crypto entrepreneurs?
Dubai, particularly, is well positioned to seize the opportunity as it offers a friendly regime for businesses operating in Web 3.0 and digital assets, including crypto currencies. Factors such as a well developed Web 3.0 ecosystem, transparent regulatory framework, growing user base, as well as an equitable tax regime with lesser compliance burden, are contributing to making Dubai the emerging crypto hub.
According to a survey by Toluna, 33 percent of the UAE claim to have invested in cryptocurrencies, as against 30 percent who’ve invested in the asset class globally. Additionally, the survey revealed that UAE residents plan to allocate 26 percent of their investable assets to cryptocurrency, compared with 20 percent globally.
This investor interest is equally complemented with business growth and a favorable policy landscape. As per reports, Dubai expects more than 1,000 cryptocurrency businesses to be operational by 2022, as it accelerates efforts to boost its digital economy.
Digital asset regulation in Dubai
As a part of its facilitative policy framework, Dubai recently adopted the “Dubai Virtual Asset Regulation Law”, aimed at creating an advanced legal framework to protect investors. It will enable virtual asset management, facilitate the exchange of cryptocurrencies, and prevent the manipulation of virtual asset prices. It will also provide international standards for virtual asset industry governance with the objective of promoting responsible business growth in the emirate.
Under the new law, the Dubai Virtual Asset Regulatory Authority (VARA) will be established to regulate the digital asset sector throughout the emirate, including special development zones and free zones, but excluding the Dubai International Financial Centre. The VARA will also be responsible for licensing and will have legal and financial autonomy over the virtual asset sector.
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India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for more support on doing business in in India.
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