A major announcement in the Budget is that the Reserve Bank of India will issue digital currency.
Crypto currencies like Bitcoin or Ethereum are outside the control of central banks. They are run independently by a group of participants. In contrast, the digital currency issued by the RBI will be controlled by the RBI.
Digital currency is just like a printed note, except that there is no paper. Just as you have a number printed on a note, there is a number assigned to the digital currency. This number will be stored in the computer of the RBI and there will be transparency about who buys, sells and holds the digital currency.
So, if one were to buy Rs 100 in digital currency, then the RBI will provide you with a number valued at Rs 100 and its computer will show that you are the owner of that money. You can transfer the money by your mobile phone to another person just as you hand over a note.
This move by the finance minister is in the right direction. The world is moving towards digital currency. It is less expensive in terms of the cost of printing of notes and the speed of the transaction is also increased.
The finance minister has also announced a flat 30 per cent income tax on the income generated from crypto assets. This too is a move in the right direction. Crypto profits are not likely to be made in the digital currency promoted by the RBI because the latter will determine its value. However, the price of crypto currencies like Bitcoin can vary because the price depends upon the demand and supply. When there is demand, the price can increase. It is possible that you may buy a Bitcoin at Rs 2 lakh and then sell it at Rs 4 lakh. In such a situation, the finance minister has stipulated that your income will be taxed at 30 per cent, which is higher than the highest slab of corporate or individual income tax.
This indicates that the finance minister wants to discourage investment in crypto currency. This also is correct because these are highly speculative and could also destabilise our financial system. Therefore, the finance minister is moving in the right direction in introducing digital currency and taxing crypto currency.
The writer is former Professor of Economics, IIM Bengaluru
(If you have a story in and around Mumbai, you have our ears, be a citizen journalist and send us your story here. )