In her Budget 2022 speech, Finance Minister Nirmala Sitharaman proposed to impose 1% TDS on all virtual digital asset transfers. While finer details on this are awaited, crypto community and market experts in the country think this move will significantly hit crypto trading activities.
“…in order to capture the transaction details, I also propose to provide for TDS on payment made in relation to 24 transfer of virtual digital asset at the rate of 1 per cent of such consideration above a monetary threshold,” Sitharaman said.
Along with the 1% TDS, Sitharaman also proposed 30% tax on income from transfer of virtual digital assets, including crypto and NFTs. Experts believe Sitharaman’s proposals have removed uncertainties in the minds of investors and traders, who previously feared a blanket ban on crypto activities.
“The 1% TDS is marginal compared to charges on other services in India. It means digital asset tracking can be controlled for the government and eventually control over the economy. There were fear in investors mind, if they can even be jailed for owing crypto or shall we start crypto venture or not? I think it is the fear of uncertainty that drives investors away not the taxes. Investors will welcome the move specially now mainstream companies and Institutional investors will participate in crypto ventures at ease,” Dileep Seinberg , Founder & CEO at Thinkchain, told FE Online.
“If a traders makes 10 transactions per day for trading 10 lakh each, it will cost them 10,000 rupees x 10 transactions = 1 Lakh rupees. Though trading within the platform are not charged as 1%. It’s like charging on remittance or doing IMPS to other person,” he added.
According to Sharat Chandra, VP- Research and Strategy , EarthID, a self-sovereign Identity Management Platform, in the absence of clear guidelines on how to implement TDS, the 1% TDS rule on transfer of virtual digital assets is going to be a compliance nightmare for both investors as well as centralized exchanges.
“Some of the investors have already moved their digital assets to wallets outside India. It’s likely to impact trading adversely. Crypto investors would shift to a peer-to-peer trading model and prefer decentralized exchanges over centralized exchanges. Intra-day frequent trading on exchanges will be impacted as TDS on multiple trades would mean a substantial deduction on trading income,” he said.
TradeSmart CEO Vikas Singhania said the 1% TDS rule is a dampener for trading in the asset class.
“While it may not affect investing volumes, trading volume in the sector will be surely hit.If a trader takes 10 trades in a month, he will have to earn at least 10 percent on these trades cumulatively, just to recover the TDS cost. On top of it, the brokerage, and GST charges have added more risk to trading in cryptocurrencies. Whatever residual profits are left will now be subjected to capital gains and other charges, making a profitable living off cryptocurrencies more difficult,” said Singhania.
Trading volume on large exchanges to be hit
According to Gaurav Mehta, Founder of Catax, an online crypto auditing and taxation software, the 1% TDS rule will hit trading volumes on large exchanges. However, there might me a better price discovery.
“I believe that trading volume on large exchanges where liquidity is provided by market makers and third parties would be significantly affected, as 1% TDS would be a barrier for artificial liquidity providers,” Mehta said.
“Otherwise, exchange operating in traditional models would have little impact because trades there are driven by transactions rather than speculations. Virtual assets will see reduced volume, but better price discovery, and the market will a lesser susceptibility to price manipulations, effectively eliminating speculation and pump-and-dump schemes and ensuring that innocent crypto investors are better protected on long term,” he added.