The Legal and Financial Landscape for Web3 Startups in India (DAOs, DeFi, NFTs) – 2025 Guide

The global phenomenon of Web3 – the decentralized internet built on blockchain technology – is rapidly transforming digital interactions, ownership, and finance. India, with its vibrant tech ecosystem and large talent pool, has a keen interest in this space. However, for Web3 startups delving into Decentralized Autonomous Organizations (DAOs), Decentralized Finance (DeFi), and Non-Fungible Tokens (NFTs), the journey is marked by immense innovation potential coupled with a complex and evolving legal and financial landscape.

Navigating this nascent yet rapidly growing sector requires a nuanced understanding of both the technological paradigm and the regulatory ambiguities. At CA Sweta Makwana & Associates, we understand these intricate challenges and guide Web3 ventures through the complex compliance and financial planning pathways in India.

1. Understanding the Web3 Paradigm: A Quick Overview

Before diving into the complexities, let’s briefly define the key components of Web3:

Web3: The vision of a decentralized internet, where users have greater control over their data and interactions, built on blockchain, smart contracts, and cryptocurrencies.
DAOs (Decentralized Autonomous Organizations): Community-led entities without central authority, governed by rules encoded on a blockchain. Members typically vote on decisions using native tokens.
DeFi (Decentralized Finance): An ecosystem of financial applications built on blockchain, aiming to recreate traditional financial services (lending, borrowing, trading, insurance) without intermediaries like banks.
NFTs (Non-Fungible Tokens): Unique digital assets representing ownership of real-world or digital items (art, music, collectibles, gaming assets, virtual land), verifiable on a blockchain.

2. India’s Evolving Legal Stance on Web3: A Landscape of Ambiguity & Caution

As of 2025, India’s approach to Web3, crypto assets, DAOs, and NFTs remains largely ambiguous and cautious, marked by the absence of a comprehensive, dedicated regulatory framework.

No Comprehensive Law Yet: Despite ongoing discussions and expert consultations, a definitive law specifically regulating the broader Web3 space is yet to be enacted.
“Asset” vs. “Currency”: The government’s stance primarily treats cryptocurrencies (often termed “Virtual Digital Assets” or VDAs) as “assets” rather than legal tender or currency. This distinction is crucial for taxation.
Financial Bill 2022: This landmark bill introduced a taxation framework for VDAs, which is currently the most definitive step towards recognizing and taxing crypto assets. This implies de facto recognition for taxation purposes, even if not explicitly as legal tender.
Regulatory Sandboxes: While the RBI has a FinTech sandbox, and IFSCA has one for DLT in GIFT City, a broader sandbox specifically for the full spectrum of Web3 innovations is still developing.
Global Context: India actively participates in G20 discussions on a global regulatory framework for crypto assets, indicating a move towards a more harmonized approach.

3. Navigating Key Regulatory Hurdles for Web3 Startups in India

The lack of clear legislation poses significant challenges, requiring startups to operate in a high-risk, high-reward environment.

A. Cryptocurrency & Virtual Digital Asset (VDA) Taxation:

30% Tax on VDA Transfers: A flat 30% tax is levied on any income from the transfer of VDAs. This includes profits from crypto trading, NFT sales, etc.
1% TDS on VDA Transactions: A 1% Tax Deducted at Source (TDS) is applicable on payments made for VDA transfers exceeding specified thresholds.
No Set-off of Losses: Losses from VDA transfers cannot be set off against any other income or carried forward to subsequent years. This significantly impacts trading strategies.
Gift Tax: VDAs received as gifts are also taxable in the hands of the recipient.
Underlying Legal Status: Despite taxation, the precise legal classification of VDAs (e.g., as commodities, securities, or distinct digital assets) remains unclear, which could lead to further regulatory changes.

B. Decentralized Autonomous Organizations (DAOs):

Legal Personality: One of the biggest challenges. How does a DAO operate as a legal entity in India? Are they considered unregistered partnerships, AOPs (Associations of Persons), or even companies by implication?
Liability: Without clear legal recognition, who is liable for a DAO’s actions, contracts, or debts? Is it the founders, token holders, or developers of the smart contract? This creates significant legal risk for participants.
Taxation: How are DAOs taxed? As AOPs, companies, or trusts? How are token distributions (often governance or reward tokens) to members taxed?
AML/KYC Compliance: How do decentralized entities, by their very nature of being permissionless, comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) norms?

C. Decentralized Finance (DeFi):

Regulatory Gaps: Do existing financial regulations (e.g., from RBI for banking/lending, SEBI for securities) apply to DeFi protocols (decentralized lending, borrowing, exchanges, yield farming)?
AML/KYC: Similar to DAOs, DeFi protocols face challenges in implementing robust AML/KYC for anonymous users.
Consumer Protection: The absence of a central authority means a lack of traditional investor protection mechanisms and dispute resolution frameworks.
Securities Law: Certain DeFi tokens or protocols might be deemed “securities” by regulators, bringing them under SEBI’s purview.

D. Non-Fungible Tokens (NFTs):

Taxation: Income from the creation, sale, or royalty payments from NFTs falls under VDA taxation. Income from certain play-to-earn games involving NFTs may also face specific tax treatments.
Intellectual Property (IP) Rights: Buying an NFT typically transfers ownership of the token, not necessarily the underlying copyright or intellectual property. Clarity is needed on licensing and usage rights.
Gambling/Lottery Aspects: Certain NFT projects, especially those with speculative elements or “loot box” mechanics in play-to-earn games, could potentially fall under state-specific gambling or lottery laws.
GST: The applicability of GST on the sale of NFTs (as goods or services) also requires careful consideration.

E. Data Privacy (Digital Personal Data Protection Act, 2023 – DPDP Act):

Applicability to Blockchain: How do immutable blockchain records comply with the “Right to Erasure” or data minimization principles enshrined in the DPDP Act?
Consent: Obtaining granular consent for sensitive health or financial data stored on public/private blockchains is crucial.
Cross-border Data Transfer: Relevant for global Web3 projects dealing with user data across jurisdictions.

4. Financial Planning & Operational Challenges for Web3 Startups

Beyond regulatory hurdles, Web3 startups face unique financial complexities:

Funding & Capital Raising:
- Navigating between traditional VC funding and crypto-native fundraising methods like token sales (ICOs/IDOs/STOs) or grants from DAOs/foundations.
- Complex tokenomics design, which directly impacts a project’s financial viability and value distribution.
- Compliance with FEMA (Foreign Exchange Management Act) for foreign investments, especially when received in crypto.
Revenue Recognition & Accounting:
- Managing the extreme volatility of crypto assets held as treasury.
- Complex revenue streams from transaction fees, staking rewards, lending interest, or primary/secondary token sales.
- Challenges in inventory valuation for NFTs.
- Absence of specific Indian Accounting Standards (Ind AS) for crypto assets, requiring reliance on interpretative guidance.
Treasury Management: Efficiently managing highly volatile crypto reserves, ensuring liquidity, and converting assets to fiat when needed, all while maintaining security of digital wallets.
Compliance Costs: Significant legal, financial, and technical advisory costs due to the evolving regulatory landscape.
Banking Relationships: Many traditional banks remain cautious about Web3 businesses, posing challenges in opening and maintaining bank accounts for fiat transactions.

5. The Interplay: Regulatory Uncertainty & Financial Strategy

The current regulatory uncertainty significantly impacts financial strategy:

Investor Hesitation: The lack of clear laws makes institutional investors and even some traditional VCs cautious about directly investing in Indian Web3 projects.
Business Model Adaptation: Startups must design flexible business models that can adapt to potential future regulations, including possible KYC requirements or asset reclassification.
Location Strategy: Some Indian Web3 startups explore setting up core entities in more crypto-friendly jurisdictions (e.g., Singapore, UAE) to manage global operations, while maintaining R&D and talent in India.

6. Role of a CA Firm in Empowering Web3 Startups

Navigating the complexities of Web3 in India demands specialized financial and regulatory expertise. CA Sweta Makwana & Associates provides comprehensive support:

Regulatory Advisory: Staying updated on the evolving crypto/Web3 laws, providing guidance on compliance for VDA taxation, GST implications on tokens, and potential future regulations.
Corporate Structuring: Advising on optimal legal entity formation (e.g., Private Limited Company, LLP) that can legally operate and interact with Web3 protocols in India.
Financial Planning & Modeling: Building robust financial models that account for crypto volatility, tokenomics, complex revenue streams, and funding scenarios.
Tax Compliance: Assisting with VDA tax compliance (30% tax, 1% TDS), GST implications, and general corporate taxation for Web3 activities.
Accounting & Reporting: Setting up proper accounting systems for crypto assets, revenue recognition, and expenditure tracking, ensuring audit readiness.
Fundraising Support: Advising on financial aspects of token sales, grants, and VC funding, ensuring FEMA compliance for foreign investments in Web3 projects.
Risk Management: Identifying financial, regulatory, and operational risks associated with Web3 activities and suggesting mitigation strategies.

Conclusion

India’s Web3 space is exciting and brimming with potential, but it is also fraught with unique regulatory and financial complexities. For startups venturing into DAOs, DeFi, and NFTs, a cautious yet optimistic approach, backed by robust legal and financial frameworks, is essential.

While the government works towards comprehensive legislation, proactive compliance and expert guidance are paramount to building sustainable and successful Web3 ventures in India.

Are you a Web3 innovator looking to navigate India’s evolving digital asset landscape? For expert guidance on legal and financial compliance, get in touch with CA Sweta Makwana & Associates today. We are committed to helping you build the decentralized future responsibly.