Experts have slammed the Centre’s decision to levy a tax of 1percent, to be deducted at source, on transactions involving digital assets, pointing out that not only is the government losing out on a major opportunity to earn revenues, it is also pushing investors and traders “underground”.
According to rules finalised by the government, it is mandatory for a buyer to deduct 1percent on the amount payable to sellers of digital assets when the transaction amount exceeds Rs 10,000, with effect from July 1.
The move follows the decision of the Union government to levy a flat 30percent income tax on digital assets from this year.
‘Government losing major revenue source’
Raj Kapoor, founder of India Blockchain Alliance, said deducting 1percent tax at the source would not only discourage entrepreneurs and investors from developing the industry, it would also impact the government as it will lose out on an opportunity to earn major tax revenue due to reduced transaction volumes.
Giving statistics, he said over 90percent of users trade at least 10 times and over 80percent trade at least 20 times in a month. So, implementation of the TDS (tax deducted at source) rule will affect not just users, but the government as well, he said.
“This will lead to an exodus of start-ups, entrepreneurs and professionals, further hampering a growing industry that has the potential to contribute significantly to India’s stressed economy,” Kapoor said.
‘Traders will move underground’
Experts also point out that crypto investors are more likely to move away from KYC-compliant centralised exchanges, and much of the trading activity eventually will be driven underground, making compliance enforcement an arduous task for tax authorities.
“Contagion in crypto markets has driven investors away. An onerous taxation and compliance regime will widen the investor exodus and make running a crypto business more challenging. The likes of Vauld (a lending platform) are struggling to stay afloat and have paused withdrawals. This crypto winter is going to be more painful and a longer one. We might see more consolidation in the space. Those with deep pockets like FTX will make strategic bets on crypto entities,” says Sharat Chandra, VP, Research & Strategy, EarthID.
Also read: Exclusive: Coinbase-backed crypto exchange Vauld lays off 30% of workforce, takes other measures to cut costs
Vauld pauses withdrawals
Crypto trading and lending platform Vauld on July 4 announced it was suspending withdrawals, trading, and deposits on its platform due to the financial challenges it was facing on account of volatile market conditions and the financial difficulties of its business partners.
Ironically, the Singapore-based firm, which has most of its employees in India, had asserted a couple of weeks back that it did not have direct exposure to Celsius or Three Arrows Capital, which have taken a major hit in the recent market meltdown and that Vauld remained liquid despite market conditions.
One of the reasons Vauld stated for halting withdrawals was that the company had faced withdrawals totaling $197.7 million since 12 June 2022.
The implosion of blockchain protocol Terra, lending platform Celsius Network’s financial woes, and crypto hedge fund 3AC defaulting on its loans were cited as reasons for the mass withdrawals.
Also read: Crypto exchanges hunker down after crash in prices
Trading volumes on exchanges take a massive hit
Meanwhile, after the government’s decision to impose 1percent TDS, trading volumes on major exchanges have taken a massive hit.
Trading volumes on WazirX were down about 72.5percent on July 4, compared to the volumes registered on June 30, while volumes on CoinDCX and ZebPay were down 41percent and 40percent, respectively, according to data sourced from research services provider Crebaco.
Sidharth Sogani, founder and CEO of Crebaco, said volumes have also dropped due to broader global financial market sentiments and that in India, liquidity providers have backed out, leading to substantial drops.
“I believe there is more pain to come in the coming 2-3 months as factors like an impending recession and the war in Ukraine are only adding to the negative sentiments. The government in India is not doing anything to help the space. Usually, the government comes forward to help industries survive difficult phases. But the government is wrapping the crypto space in shackles, making things difficult for the players. I am not very positive on how things will shape up,” Sogani said.
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