BENGALURU: When Finance Minister Nirmala Sitharaman announced in the Union Budget a 30% tax on any income from virtual digital asset and also a 1% TDS (Tax Deducted at Source) on all crypto transactions, the crypto industry took a sigh of relief as the announcement necessarily settled the legality question bothering the crypto ecosystem.
But as people started to interpret the pros and cons of the move, they began to look at the multiple challenges as the crypto tax kicks in.
Unanswered questions
More than the 30% tax on capital gains from crypto trading, it is the 1% Tax Deducted at Source (TDS) that is giving sleepless nights to investors, traders and exchanges alike.
The question that is bothering the exchanges most is if the 1% TDS will affect the volumes, as it will be deducted on every payment made for transfer of a virtual digital asset.
The government needs to provide more clarity, says Archit Gupta, Founder and CEO, Clear, a fintech company providing tax solutions.
“TDS compliance will be onerous for buyers to undertake; taxpayers may have hundreds of thousands of items/trades. Also, usually TDS deduction requires that taxpayers deposit TDS to the government and submit a statement of details. Usually, there are penalties for TDS non-compliance. The government has to lay down the TDS compliance process for cryptos, including relevant forms,” he adds.
Clear also has plans to tie-up with crypto exchanges to help customers adhere to the new tax norms. At present, it has 50,000 income tax filers reporting crypto income.
On the present way of calculating crypto tax, Archit Gupta said in the absence of specific guidance, tax had to be estimated and paid for a customer.
Based on the volume and frequency of trade of a customer, their income from crypto could be classified as business income or as capital gains.
Based on the latest guidelines proposed, crypto income can be calculated by reducing the cost of acquisition from the consideration received.
Many crypto exchanges have been saying that this tax will affect intra-day traders.
Sumit Gupta, Co-Founder and CEO, CoinDCX, says that the 1% withholding on the entire transaction value will make day trading, arbitrage trading, margin trading etc. unfeasible, which may significantly impact order-books and volume on crypto-exchanges; making the markets illiquid and inefficient.
India already trades at a premium of 5-7% on global crypto prices. This step will drive an increase in that premium further.
Compliance issues to manage the TDS deductions for millions of users on the platform is an operational nightmare.
A reasonable cut-off for the amount should be set at Rs 2,50,000 for TDS deductions, he adds. Crypto unicorn CoinDCX, which recently added over 1 crore users, says the timeline to implement these far-reaching changes is too short and unviable.
Darshan Bathija, CEO and Co-Founder of Vauld too says that the tax is not friendly to web developers since their income is to be treated as a gift.
“A 1% TDS needs to come down to be in line with the equities market, to encourage a healthy growth of the industry. This way liquidity and trading volume does not disappear overnight. As a long-term investor, paying TDS would not pose a problem. But this could also be detrimental to day traders dealing with multiple transactions daily,” he adds.
Intra-day trading is popular in the crypto space. About 50% of Giottus’ user base engages in it.
“However, many of the traders don’t necessarily end up with profits. We advise investors to buy and hold crypto assets for longer terms to ensure profitability and to ensure capital is not locked as TDS,” says Vikram Subburaj, CEO, Giottus Crypto Exchange.
With crypto holdings of Rs 40,000 crore, India has over 20 million crypto investors, and according to various exchanges, an investor on an average invests anywhere between Rs 10,000- Rs 50,000 in cryptocurrency.
Steep tax rates
The 1% TDS does create compliance burden and is a big deterrence to frequent trading, but the 30% tax itself is very steep. The tax is punitive in nature if you compare it with the tax on other asset classes.
The government has likened the 1% TDS on crypto transactions to Securities transaction tax (STT) on equities. But the government levies a 0.1% STT on each equity sale or purchase transactions on exchanges.
“The 30% tax on the profits and not being able to offset their losses makes people think thrice before they think about investing in Crypto. This is very steep for the low income or middle-income Crypto traders,” says Bhagaban Behera, CEO and Co-Founder of Defy.
