Finance Minister Nirmala Sitharaman has proposed to impose 1% TDS on crypto transactions. According to the new provision a buyer needs to deduct 1% of the sale consideration as an advance tax on behalf of the seller on every trade.
Experts however say that the new provision can affect trading volumes as the complex world of crypto can make it challenging to enable the provision operationally. “Short term traders would need clarity on how much of capital can be locked against a PAN card in a year. Frequent traders may fall short of capital if 1% TDS is deducted for every trade. They might have to resort to trades just below the TDS trigger limit to circumvent this or operate in foreign exchanges who may not deduct TDS,” says Vikram Subburaj, Co-Founder and CEO of Giottus Cryptocurrency Exchange.
Crypto exchanges charge broking fees on every transaction. Short term traders account for sizable chunk of their revenue because of frequent transactions. Now exchanges fear that the new rule may drive them away as frequent traders may fall short of capital if 1% TDS is deducted for every trade.
The TDS will apply where sale consideration is more than or equal to Rs 50,000 (for specific individual payers) and Rs 10,000 for others.
Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP, says, “There will be practical challenges for the buyer to identify the seller of a crypto. Further, TDS provisions are also applicable on 'in-kind' payments. This could lead to cash flow issues for the buyer who will have to arrange for funds to deposit taxes with the exchequer. "
"Further, in cases of a crypto barter, obligation to deduct tax could fall both on buyer and seller. Levy of TDS on transfer of a VDA will also reduce the margins for active traders and the TDS provisions are a burden for volume trading. The TDS provisions are applicable to non-residents too and the practical challenge of identifying the seller could get accentuated in such cases," he adds. Nithin Kamath, Zerodha CEO and co-founder, who is known for his educational tweets on markets and business, recently tweeted, "They say the devil is in the details. I missed the 1% TDS on all Crypto trades, similar to the TCS of 0.1% on Gold. I assumed that the TDS is only on the gains. With this 1% TDS, I think Crypto volumes in India will drop off the cliff come July 1st 2022 when it is implemented."
Kamath added, “A 1% TDS means 1% of every trade value is blocked by the platform. So in 50 trades, 50% of the account value can be blocked for TDS regardless of the P&L. Volumes are bound to drop and spreads can widen significantly. This will end up creating a snowball effect."
Currently, TDS is deducted on immovable property where it is the responsibility of the buyer to deduct TDS @ 1% on the total sales consideration and deposit the same with the income tax authorities. However, unlike immovable property where buyer and seller know each other, it might not be so easy in case of cryptocurrencies.
Subburaj says, “The 1% TDS is devised as a mechanism to detect transactions against a PAN card. While it theoretically serves its purpose, the complex world of crypto can make it challenging to enable it operationally. The Government needs to clarify certain aspects of the proposal. Especially on how crypto sellers deduct this TDS and submit details to the Government post the transaction."
"What is the role of exchanges in the above? Will the exchanges only enable the underlying tech or take responsibility of tracking and reporting? Does TDS apply to a peer-to-peer transaction that is enabled outside of an exchange? If so, PAN details of every buyer has to be made available with the sellers which may not be practical or available," he adds.
Another complexity is when the buyer is not based in India – given the global marketplace that exists in crypto. "How will TDS be deducted in a transaction involving an Indian buyer and a foreign seller?” notes Subburaj.
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