When India’s government announced a plan to tax crypto assets in February, the 30% rate on income from digital-asset investments drew the most attention. However, it is a separate tax that has the industry concerned about a potentially destabilizing liquidity constraint.
In addition to the capital gains tax, the finance ministry imposed a 1% tax deducted at source, or TDS, on all digital-asset transfers of a specified magnitude beginning July 1.
TDS, according to cryptocurrency exchange executives, lawyers, and specialists of cryptocurrency tax in India, will drain liquidity out of the market by requiring high-frequency traders to drastically reduce their activity. When combined with the government’s decision not to allow the offsetting of trading losses in digital assets, they believe it will hasten the migration of crypto enterprises and people from India.
Bleeding Ability
The tax package and the prohibition on offsetting losses — which solely applies to cryptocurrency — are the latest salvo from a government that has yet to explicitly announce that it will accept cryptocurrencies. With an estimated 15 million active cryptocurrency users, India has been in regulatory limbo since the Supreme Court invalidated a central bank decree prohibiting regulated institutions from dealing with digital-assets companies in 2020.
Sandeep Nailwal, co-founder of Indian blockchain firm Polygon, warned last month that as a result of the uncertainty, hundreds of developers, investors, and entrepreneurs are fleeing to more crypto-friendly locales.
When the government originally announced the crypto levies, it was met with relief because it was seen as an indication that cryptocurrency trading would not be outright prohibited. That changed once the industry understood the TDS’s details.
If a transaction exceeds 10,000 rupees (approximately $132), the buyer of a crypto asset must deduct the 1% TDS on behalf of the seller. Smaller transactions would also be charged if they exceeded 50,000 rupees in a fiscal year, according to Bhasin.
If the entire amount set aside for TDS during a fiscal year exceeds the investor’s overall tax burden for the year, the investor will be entitled to a refund.
Capital is stifled
When trading on a centralized exchange, the bourse is responsible for deducting the TDS, according to Bhasin. People generally trade anonymously on a decentralized trading network where the buyer and seller communicate without an intermediary, making TDS collection difficult.
While a capital gains tax decreases the appeal of cryptocurrency for investors, detractors argue that the TDS threatens the market’s entire foundation. In India, there is no such fee on stock trading.
According to Garegrat, who is also a member of India’s Blockchain and Crypto Assets Council, a typical high-frequency trader might have 60% of their capital blocked for TDS payments after just 100 deals. On March 25, Finance Minister Nirmala Sitharaman stated in the Lower House of Parliament that the TDS will let the government to track transactions and is not an additional fee. However, executives and experts argue that if that is the only goal, it could have been accomplished with a much lower rate without affecting trading.
Enforcing the TDS system on offshore trading platforms, as with decentralized exchanges, will be nearly impossible, according to Garegrat. As a result, the levy will primarily serve to shift trading away from the locally-based exchanges over which the Indian government has the most control, he noted.
According to Quagmire’s Bhasin, the method becomes much more onerous for traders in crypto pairs such as Bitcoin/Ether. This is due to the fact that each deal includes two different transactions, such as acquiring Bitcoin from one counterparty and then selling it and purchasing Ether from another.
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