How will the 1% TDS provision affect the development of the crypto industry

Taxes are an important source of government revenue, integral to the functioning of the economy. The purpose of taxation is for the government to obtain funds that can be spent on providing the infrastructure, public services and welfare projects necessary for the development of the country.

The Indian government has been revolutionary in its reform and has supported many emerging industries by providing preferential policies and tax incentives. With more than 61,000 startups recognized by the Department for the Promotion of Industry and Internal Trade (DPIIT), India has become the third largest startup ecosystem in the world.

Several well-thought-out tax provisions have been highly beneficial to the country, leading to efficient tax collection, black money mining, and the development of rural areas and emerging industries. Such favorable policies and tax benefits have resulted in income generation, employment growth and higher supply of goods and services, which directly contribute to India’s GDP.

Some tax reforms have benefited the economy

Stock Exchange Tax (SIT) which is a tax levied on securities trading is a huge success story in India generating Rs. 22,000 crore turnover per year. This is a recurring source of revenue for the government, with very low fees and at the same time beneficial to the stock market. Similarly, Arun Jaitley’s tax amnesty proposal introduced the “IDS 2016” tax amnesty plan, which resulted in the disclosure of more than Rs. 65,000 crore black money, directly increasing tax cash flow Rs. 29,362 crore in government kitty.

Many financial benefits in remote areas such as special benefits for any company that locates production base in North East and Himachal Pradesh has led to some companies setting up large factories in these places. such a remote location and create job opportunities for local people. Similarly, the government-launched Manufacturing Linked Incentive (PLI) scheme has been very successful for the manufacturing sector in India.

Some tax reforms were not well thought out but didn’t work

There are examples where unfavorable tax regulations for certain industries in India have been detrimental to the development of the country and India has lost its chance to be at the forefront in these industries. loss of potential sources of income. The angel tax is an example of a tax that the government wants to levy on the unrealized value added of startups but due to the backlash against adverse terms, the government had to withdraw the funds. rules. If India decided to go ahead with the Angel Tax, it would certainly not be home to as many unicorns as it is today.

Similarly, in the case of increased capital gains in the Vodafone Hutch deal, the government decided to tax retroactively, a transaction in which the ownership of Indian property is transacted overseas. This led to a crisis of confidence for India in the global market and the government eventually had to withdraw the terms.

TDS on Cryptocurrency and Its Implications for the Industry

The recent offering of TDS on crypto trading (Section 194) is a current example of a tax provision that could greatly disadvantage the crypto industry. Tax regulation will not only discourage entrepreneurs and investors from developing the growing industry, but the government will also suffer as they will lose the opportunity to earn large tax revenue due to the volume of transactions. in reduced space.

The Finance Bill 2022 introduced a TDS of 1% for the transfer (read sale) of Virtual Digital Assets (VDA) under section 194S. The rationale behind this TDS deduction like any other TDS provision will have two parts: one is to get information about the professions so that the government can collect the optimal tax rate and second is a recurring source of revenue before people pay their final taxes. of each quarter or year. What the government doesn’t realize, however, is that TDS will suck liquidity out of the market.

In the crypto market, people rotate capital more often, i.e. total revenue/capital employed is a high number. Historically, it has been observed that about 95% of users trade at least 10 times and about 88% of users trade at least 20 times in a month. The current TDS provision (194S) is being activated for both users as well as the government as the trading volume in the market will be affected. Even at 1 percent, the TDS rate will be at least 10 times a month (120 times a year) for about 95 percent of users and at least 20 times a month (240 times a year) in about 88 percent of users.

TDS provision will require increased working capital needs and will also increase unnecessary tax filings for a rather heavy user. Furthermore, a TDS of 1% per transaction will result in the government losing tax revenue as a lower amount of money will be invested/traded in the market leading to lower tax returns. And the fact that the government does not allow to cover digital asset transaction losses, an industry that is seeing many entrepreneurs and workers leave the country, further hinders the growth of an industry. growing industry around the world has the potential to make a significant contribution to India’s fintech sector.

Industry Support Recommendations

For the industry to grow, it is very important to have enough capital to do business in the market. In this regard, our recommendation to the government is as follows:

  • The government should avoid any tax regulations that suck up capital in the year from
    industry so the maximum TDS should be 0 or 0.01 percent.
  • Information collection can be done using an annual information return (AIR).
    mechanism. In any case, the government is collecting this information through many
    investigative agencies.
  • Introduce crypto-specific tax “Cryptocurrency Transaction Tax” similar to Securities
    Transaction tax.
  • Clear difference between crypto tokens, NFTs and other crypto assets alike
    Tax cannot be applied to all VDAs.

The author is the CEO & Co-Founder at CoinDCX.

Disclaimer: The opinions expressed in this article are the personal opinions of the author. Gadgets 360 is not responsible for the accuracy, completeness, suitability or validity of any information contained in this article. All information is provided on an as-is basis. The information, facts or opinions appearing in the article do not reflect the views of Gadgets 360 and Gadgets 360 does not assume any responsibility or liability for the same.

Gadgets 360 Insights articles are written by industry leaders, analysts, researchers and experts in various fields related to personal technology, exclusively for our readers.

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