Express press service
BENGALURU: When Finance Minister Nirmala Sitharaman announced in the Union budget a 30% tax on any income from a virtual digital asset as well as a 1% TDS (withholding tax) on all crypto transactions, the crypto industry breathed a sigh of relief as the announcement necessarily settled the legality issue that was troubling the crypto ecosystem.
But as people began to interpret the pros and cons of this decision, they began to consider the multiple challenges as the crypto tax goes into effect.
More than the 30% capital gains tax from crypto trading, it is the 1% withholding tax (TDS) that gives investors, traders and exchanges sleepless nights.
The question of most concern to exchanges is whether the 1% TDS will affect volumes, as it will be deducted on every payment made for the transfer of a virtual digital asset.
The government needs to provide more clarity, says Archit Gupta, founder and CEO of Clear, a fintech company providing tax solutions.
“Compliance with TDS will be onerous for buyers; taxpayers may have hundreds of thousands of items/trades. In addition, TDS deduction generally requires taxpayers to file TDS with the government and submit a statement of particulars. Usually there are penalties for non-compliance with the TDS. The government must establish the TDS compliance process for cryptos, including the relevant forms,” he adds.
Clear also plans to partner with crypto exchanges to help customers meet new tax standards. Currently, 50,000 filers report crypto income.
On the current way of calculating crypto tax, Archit Gupta said that in the absence of specific guidelines, the tax must be estimated and paid for a client.
Depending on the volume and frequency of a client’s trade, their income from crypto could be classified as business income or capital gains.
Based on the latest proposed guidelines, crypto income can be calculated by reducing the acquisition cost of the consideration received.
Many crypto exchanges have stated that this tax will affect intraday traders.
Sumit Gupta, co-founder and CEO of CoinDCX, says the 1% holdback on the total trade value will make day trading, arbitrage trading, margin trading, etc. impossible, which could have a significant impact on order books and crypto exchange volume; making markets illiquid and inefficient.
India is already trading at a 5-7% premium to global crypto prices. This step will result in a further increase in this bonus.
Compliance issues to manage TDS deductions for millions of users on the platform is an operational nightmare.
A reasonable threshold for the amount should be set at Rs 2.50,000 for TDS deductions, he adds. Crypto unicorn CoinDCX, which recently added more than a crore of users, says the timeframe for implementing these far-reaching changes is too short and unsustainable.
Darshan Bathija, CEO and co-founder of Vauld, also says the tax is not favorable to web developers because their earnings should be treated as a gift.
“A TDS of 1% needs to be reduced to be in line with the equity market, to encourage healthy industry growth. This way, liquidity and trading volume do not disappear overnight. As a long-term investor, paying TDS would not be a problem, but it could also be detrimental to day traders who process multiple trades daily,” he adds.
Intraday trading is popular in the crypto space. About 50% of Giottos’ user base is into it.
“However, many traders do not necessarily end up with profits. We advise investors to buy and hold crypto assets for a longer term to ensure profitability and to ensure capital is not tied up as TDS,” says Vikram Subburaj, CEO of Giottos Crypto Exchange.
With crypto holdings of Rs 40,000 crore, India has over 20 million crypto investors, and according to various exchanges, an average investor invests between Rs 10,000 and Rs 50,000 in cryptocurrency.
High tax rates
The 1% TDS creates a compliance burden and is a strong deterrent to frequent trading, but the 30% tax itself is very high. The tax is punitive in nature if you compare it to the tax on other asset classes.
The government compared the 1% TDS on crypto transactions to the Securities Transaction Tax (STT) on shares. But the government levies an STT of 0.1% on each sale or purchase of shares on the stock exchange.
“The 30% tax on profits and the inability to offset their losses makes people think three times before thinking about investing in Crypto. It is very steep for low-income or middle-income crypto traders,” says Bhagaban Behera, CEO and co-founder of Defy.