The Indian government’s introduction of tax deductions of 1% at Source (TDS) on cryptocurrency transactions has led numerous investors towards alternative markets, causing concerns over tax evasion and regulation oversight. This has led sector stakeholders to demand reconsideration on the rate of tax for the forthcoming Budget 2024.
The Impact of 1% TDS on Crypto Transactions
In the year 2022, the Union Budget, the 1 percent TDS on crypto transactions, was aimed at increasing the transparency and security of the rapidly expanding digital market for assets. However, the rate of 1% has resulted in a variety of unintended results:
- Migration to Overseas Platforms Based on Manhar Garegrat from Liminal Custody Solutions, the 1 percent TDS has resulted in the loss of approximately $420m in state income due to Indian cryptocurrency traders shifting to foreign platforms.
- Increase in Peer-to-Peer (P2P) Trading Peer-to-peer transactions using the escrow service on cryptocurrency exchanges have increased by fivefold in high-volume trading week.
- Use of Unregulated Exchanges The trend is for investors to turn towards unregulated exchanges to reduce the tax burden, causing questions about the protection of consumers and financial security.
- Adoption of Illegal Routes Certain investors are turning to illicit strategies to dodge taxes, such as together accounts in foreign banks and gift channels.
Industry Calls for Tax Relief
Startups and leaders in the industry are calling on the government to review how to reduce the TDS amount in the coming 2024 budget. Their suggestions include
- Reducing TDS to 0.01%: Nischal Shetty of Shardeum recommends lowering TDS to 0.01%. TDS is 0.01 percent in order to benefit the Indian cryptocurrency industry, help it compete with the world, and ensure that transactions are within Indian legal jurisdiction.
- Allowing Loss Offset: Ashish Singhal of PeepalCo suggests allowing offsets of losses resulting from the sale of virtual digital assets (VDA) in a manner similar to other types of capital assets.
- Creating Special Economic Zones Proposals includes creating special economic zones specifically for web3 companies and providing tax exemptions to boost growth in the industry.
- Clarifying Regulatory Framework Industry actors are calling for a clear legal framework to deal with taxation challenges and set clearly defined guidelines for income as well as transactions.
The Need for Balanced Regulation
The current scenario demonstrates the delicate balance needed to control the cryptocurrency market. While the government seeks to regulate and tax transactions in crypto, excessively strict measures could encourage investors to look for unsafe and unregulated alternatives. Shivam Thakral, the CEO of BuyUcoin, insists that there is a need to be clear, rather as a stricter regulatory measure: “In the upcoming Budget, we urge the government to replace uncertainty with clarity, not with a heavy hand but with a guiding light.”Global Context and India’s Position
As efforts to improve the regulation of cryptos grow more intense, with numerous G20 nations preparing national laws on crypto and regulations, India’s approach to cryptocurrency taxation is viewed as an outlier. Despite its regulatory hurdles, India secured the top position in the Chainalysis 2023 Global Crypto Adoption Index, which indicates significant potential for this sector.
Bottom Line
The unintended effects of the 1 percent TDS on cryptocurrency transactions in India suggest the need for a more sophisticated way of regulating this rapidly growing market. As the government is preparing for Budget 2024, it faces the issue of balancing regulatory supervision with the need to promote innovation and growth within the realm of digital assets. The re-examination of how to calculate the TDS amount could become a significant step towards returning crypto transactions to the realm of regulation, which will ensure tax compliance while promoting the development of India’s digital economy.
