“The 1% TDS has certainly impacted the trading volume across platforms,” Ashish Singhal, Co-founder and CEO, CoinSwitch Kuber told Medianama in a statement. His comments were in response to a question about the implementation of TDS (tax deducted at source) on transfer of virtual digital assets and whether it was a cause for concern.
A cursory look through the data on Coingecko reveals that the trading volume on WazirX, one of the biggest crypto exchanges in India, dropped by more than 200 per cent from nearly $13 million on July 1, 2022, to $4 million on July 2, 2022.
“At present, it is still premature to predict the ramifications of TDS. We will be in a better position to understand this by the end of July. There has been a fall in trading across the industry as investors shift to hold, there may be another dip as traders see their capital getting locked while trading on KYC-compliant Indian exchanges,” Rajagopal Menon, Vice President, WazirX, told Medianama.
Singhal, however, was less worried about the numbers than he was about the risk of investors using unregulated exchanges in the grey market. “…the important question is if users are trading less frequently or if the trading has moved to the Crypto grey market,” he added.
The Indian government announced a tax regime for digital assets during its 2022-23 budget presentation in February this year. The state imposed a 30 per cent tax on income earned from transfer of virtual digital assets which came into effect from April 1, 2022.
The government also directed buyers to levy one per cent TDS on all transactions in order to capture transaction details. It was to be applicable on transactions from July 1, 2022. The Central Board of Direct Taxes (CBDT) also issued guidelines in the last week of June to resolve doubts. The guidelines suggested that the TDS will be deducted by exchanges in most cases.
The tax regime was welcomed by industry stakeholders as they believed a tax regime granted some degree of legitimacy to the crypto industry. But they were queasy about the rate of taxation, stating that it would be detrimental to the growth of a nascent industry.
Why it matters: The Indian crypto industry had been concerned about the implementation of TDS as it thought the move would suck liquidity out of the market and make trading infeasible. The move is likely to push people towards unregulated exchanges as they look to avoid paying TDS that can only be recovered at the end of the financial year.
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What is the impact on trading frequency?
A trader sentiment survey, conducted by WazirX and Zebpay, of 9,500 respondents revealed that 83 per cent of traders were deterred by the recent tax rules which has impacted their trading frequency. Moreover, 29 percent of the respondents traded less than their activities in the pre-tax period.
According to the survey, 27 per cent of the respondents sold over 50 per cent of their portfolio before April 1, whereas 57 per cent sold under 10 per cent. The two exchanges contended that the Indian government is likely to lose revenue from tax collections if they continue on this path.
Only traders who have actively traded, every day or more than twice a week, from this year’s beginning to April 15, 2022 were covered by the survey. The survey also had holders who were classified as those who traded a few times a month or had invested for the long term.
Risk of trader migration to unregulated exchanges
The survey also found that around 24 per cent of respondents were contemplating shifting their trading activities to international exchanges due to a steep rate of taxation domestically. It is a worrisome trend as many people believe that they can avoid tax liability through this route.
The international exchanges are not subject to the laws of India and as such cannot be held accountable by the Indian government for non-compliance.
1/Something important for Indian crypto traders to understand
• Trading on foreign exchanges that don’t deduct TDS would mean YOU have to pay TDS directly to Income Tax Department
• You need to know PAN of the seller on international exchanges
• May be asked to pay 20%…
— Nischal (Shardeum) ⚡️ (@NischalShetty) July 4, 2022
However, WazirX’s founder and CEO Nischal Shetty explained that traders are still liable to pay tax even if they transact on foreign exchanges. He asserted that misinformation around the lack of TDS on foreign exchanges is “incorrect”.
Singhal argued that KYC-compliant crypto exchanges and platforms have developed a framework for TDS compliance in India but the grey market is unlikely to bother with compliance as there is no visibility over the real identity of the user or the scale of transactions.
“The fear is high TDS may disincentivise users from trading within KYC-compliant platforms,” he said.
Impact on millennials
The survey found that 28 per cent of the respondents between the age of 18 and 35 have sold more than 50 per cent of their holdings before April 1.Furthermore, 23 per cent wished to move their holdings to an international exchange to avail a more favourable tax climate.
The group is likely to be inexperienced and the crypto investment may be their first foray into financial markets. The lack of experience is what makes them susceptible and more at risk than any other group.
Singhal warned that failure to comply with the tax requirements will attract penalties. ”Non-compliance with tax regulations is a serious matter.”
Zebpay CEO’s Avinash Shekhar said that a considerable number of respondents intend to reduce their trade frequency and that restrictive policies serve as a barrier. Shekhar urged the Union government to reconsider certain provisions for a favourable regulatory environment.
What about NFTs?
The definition of virtual digital assets laid down in the Finance Bill, 2022, includes NFTs as well. MediaNama spoke to Ramkumar Subramaniam, CEO and Co-founder, GuardianLink— an NFT marketplace— to understand the impact.
Subramaniam acknowledged that there was an impact on trading volume in April as people had questions about the application of tax. “People were trying to reduce transactions. There was an initial apprehension and there was a decrease in trade volume to the tune of 10 per cent to 20 per cent. I don’t see a huge impact in terms of NFTs because it’s a growing market and people are willing to pay tax.”
When asked about the risk of users flocking to foreign platforms, Subramaniam clarified that users will still be liable to pay tax. “I believe once you see enough trading happening on Indian exchanges and marketplaces, there’ll be a reduction in trading on other (foreign) exchanges,” he said.
Medianama has reached out to OpenSea and MagicEden over email and the post will be updated if and when they send a response.
Key recommendations for the government
Singhal recommended that the government should consider a reasonable TDS rate.
“The purpose of the TDS is to establish a trail of the transaction. The same can be achieved with a lower TDS rate. This incentivizes users to stay on KYC-compliant platforms and within India’s regulatory purview. User protection and tax compliance can co-exist,” he averred.
Menon said in a statement: “The survey results stipulate the need to reform certain conditions to aid the growth of crypto investors in the country and revive trading volumes.”
Subramaniam highlighted that NFTs should not be taxed in the same slab as other crypto assets.
“Crypto and NFTs have to be treated differently. NFTs are becoming a commodity as there is utility where I buy the NFT as an access to something or I use it as an asset in a game. It has turned out to have more use cases and is utility-driven than a trading asset. The tax implication will have to change accordingly,” he said.
He pointed out that the government has to understand how NFTs work and levy tax accordingly. “NFT will become a utility-driven asset. There’s a large volume of trading that will happen but at a lower cost,” he said. “ I don’t think the same bracket of taxing (sic) will work.” He added that the government should look to bring down the rate of TDS if possible.
Subramaniam comended the government’s move to include NFTs in the virtual digital assets as it helped clear uncertainty around NFTs. He now hopes that the government comes up with a law as soon as possible because it will be “helpful” for the industry.
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