All industry stakeholders—exchanges, investors and traders—have spent the last few days huddled with their tax and legal experts to understand the implications of the Budget announcements on operations, profitability and compliance.
“We look forward to the opportunity to work with the government to create a vibrant and robust tax and regulatory regime for VDAs and cryptos in India that protects consumer interests and is on a par with asset classes,” said the Blockchain and Crypto Assets Council (BACC) officials.
The council wants the government to clarify which party in a crypto transaction—the crypto-exchange, the crypto-broker, or the buyer—was responsible for paying consideration for the transfer of VDA to an Indian resident.
With respect to crypto-crypto transactions, which are in the nature of a barter, the officials said, there could be the avoidable complication of whether the buyer or seller is liable to withhold tax on the transaction, the officials said.
The exchanges will have to deal with valuation issues when it comes to withholding tax on crypto-crypto transactions, as well as practical difficulties in withholding and depositing tax in Indian rupees for such transactions.
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“At what point in time does the broker or the exchange have to withhold TDS? The industry would need clarity in order to align operational challenges (e.g., to change to a dual wallet system or collect INR from users to discharge TDS),” said officials.
Gaurav Dahake, co-founder & CEO at BitBns, a cryptocurrency exchange, said that the policy makers have kept the regulations as broad as possible and the industry needs specifics to move forward. “What crypto needs are supporting laws like for EVs and clean energy so that India can lead the revolution,” he said.
The council said that in order to maintain parity and avoid any discriminatory treatment, crypto buyers/customers should also be allowed to offset, as well as carry forward, their crypto-specific losses.
“Highs and lows in crypto trading are no different from those in the stock market,” they said.
One of the biggest hindrances the new tax structure has posed is for day traders and market makers. 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% to global crypto prices. This step will drive an increase in that premium further,” said Sumit Gupta, CEO and co-founder, Coindcx.
The council feels that Section 194S—which contains provisions regarding TDS deductions—should also be included in Sec 197 of the Income Tax Act, 1961, which allows the taxpayer a facility to approach the tax department for a nil or lower deduction rate.
Anoush Bhasin, founder of New Delhi-based cryptocurrency tax advisory Quagmire Consulting, said that since the traders play on small margins, making multiple trades a day, they will face immense capital and compliance issues given how the regulations stand today.
“Nearly all the companies in the crypto (and VDA) space in India are new-age startups, and are proud of their achievement of putting India on the global crypto map. The tax regime for VDAs needs to support this vibrant but fledgling ecosystem, which comprises several home grown/funded as well as bootstrapped businesses built by young Indian entrepreneurs,” said the industry council. “The crypto industry already makes healthy contributions to the economy in the form of employment, taxes, and foreign investments. A penal tax regime could go against the government’s objective of supporting Indian startups and generating tax revenue.”
Industry leaders say that Polygon—an Ethereum scaling platform that started out in Bengaluru and now operates out of Dubai—was valued more than Paytm and Zomato, and if the Indian government plays a constructive role, many successful crypto ventures could come out of India.
“The government has now got skin in the game. A supportive policy and tax regime can be a gamechanger for the crypto industry,” said Darshan Bathija, CEO and co-founder, Vauld, a Singapore-based digital asset platform.
On February 1, finance minister Nirmala Sitharaman announced that the government would impose a blanket tax rate of 30% (plus surcharge and cess) on the transfer of “virtual digital assets” (VDA). And according to Section 194 S (1)
of Finance Bill, there would be a 1% TDS on the sale value of virtual digital assets.
However, the TDS can be set-off against a seller’s actual tax liability.