The 1% tax that is causing havoc in India's cryptocurrency industry

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The 1% tax that is causing havoc in India’s cryptocurrency industry

The 1% tax that is causing havoc in India's cryptocurrency industry
Source: Bloomberg
1648972195 03 Apr / 07:49

The 30% rate on income from digital-asset investments was the focus of attention when India's government announced a plan to tax crypto assets in February. However, the industry is warning of a potentially disruptive liquidity constraint as a result of a different tax.

Along with the capital gains tax, the finance ministry said that beginning July 1, all digital-asset transfers over a specific size will be subject to a 1% tax deducted at source, or TDS. According to Anoush Bhasin, founder of crypto asset tax consultancy business Quagmire Consulting, no other government has such a tax on crypto.

TDS, according to crypto-exchange executives, lawyers, and tax specialists, will suffocate the market by compelling high-frequency traders to drastically reduce their trading volume. They claim that this, together with the government’s decision not to allow the offsetting of trading losses in digital assets, will hasten the migration of crypto enterprises and people from India.

India has made it illegal to compensate for a loss in one cryptocurrency with a gain in another.

The TDS, according to Nischal Shetty, CEO of WazirX, India’s largest crypto exchange, is “the worst-case scenario for the business.”

Manhar Garegrat, executive director of CoinDCX’s policy department, said: “There will be no liquidity left in the markets,” said Manhar Garegrat, executive director of policy at crypto exchange CoinDCX. “Trades placed by buyers will not get executed as efficiently as they do today, and such inefficiency will eventually dwindle the whole ecosystem.”

The tax package, as well as the prohibition on offsetting losses — which exclusively applies to crypto — is the latest salvo from a government that has yet to explicitly announce that cryptocurrency will be allowed. Since the Supreme Court invalidated a central bank regulation prohibiting regulated businesses from interacting with digital-assets companies in 2020, India, which has an estimated 15 million active crypto users, has been in regulatory limbo.

Thousands of developers, investors, and entrepreneurs are fleeing to more crypto-friendly places as a result of the uncertainty, according to Sandeep Nailwal, co-founder of Indian blockchain firm Polygon.

When the government first announced the crypto levies, it was greeted with relief because it was regarded as an indication that cryptocurrency trading would not be outright banned. As the industry grasped the TDS’s details, that changed.

If a transaction exceeds 10,000 rupees (about $132) under the new rule, the buyer of a crypto asset must deduct the 1% TDS on behalf of the seller. According to Bhasin, smaller trades would be taxed if they exceeded 50,000 rupees in a financial year.

If the entire amount set aside for TDS during a fiscal year exceeds the investor’s overall tax burden for the period, the investor will be entitled to a refund.

Economy is suffocating

When trading on a centralized exchange, the bourse is responsible for deducting the TDS, according to Bhasin. People often trade anonymously on a decentralized trading network where the buyer and seller engage without the use of a middleman, making TDS collection difficult.

While a capital gains tax decreases the appeal of crypto to investors, detractors argue that the TDS threatens the market’s basic foundations. In India, there is no such tax on stock trading.

According to Garegrat, who is also a member of India’s Blockchain and Crypto Assets Council, a typical high-frequency trader may find 60 percent of their capital blocked for TDS payments after just 100 deals.

Dhruva Advisors, a tax and regulatory advice firm, is led by Dinesh Kanabar stated: “The way the tax has been worked out will lead to people moving out of the country”.

Finance Minister Nirmala Sitharaman said the TDS will allow the government to track transactions and is not an additional levy in a speech to the Lower House of Parliament on March 25. However, executives and experts argue that if that was the only goal, it could have been accomplished just as well with a far lower rate without causing trading to be disrupted.

Enforcing the TDS system on offshore trading platforms, as with decentralized exchanges, will be nearly impossible, according to Garegrat. As a result, he continued, the levy will primarily serve to force trading away from locally-based exchanges, where the Indian government has the most visibility.

According to Quagmire’s Bhasin, the system becomes even more difficult for traders in crypto pairs like Bitcoin/Ether. This is due to the fact that each deal entails two different transactions, such as buying Bitcoin from one counterparty, then selling it and buying Ether from another.

“At one stage you will liable to lose 1% because you are selling BTC and at the next step you will be liable to deduct 1% TDS because you are buying ETH from another seller,” he stated. “The accounting will be super crazy for this.”

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