Income Tax website rectifies error, Government sticks to 1% TDS on virtual assets

Relief was shortlived for Indian crypto exchanges as the Income Tax portal has updated its document on Tax Deduction as Source (TDS), restoring the TDS on Virtual Digital Assets (VDAs) at 1 percent.

The website earlier mentioned that the TDS rate for virtual digital assets has been dropped to 0.1% from 1% as announced earlier in the budget. However, after the change was noticed by many the website updated the document rectifying the error.

This drew mixed responses from the industry, while some welcomed the change, others suspected it to be an error on the website.

The website had also added that no tax will be applicable, if the aggregate value does not exceed Rs. 10,000 during the financial year and does not exceed Rs. 50,000 during the financial year, which remains unchanged.

The 1% TDS is set to be applicable starting July 1 and has been the key reason for a drastic drop in volumes on Indian crypto exchanges, worsened by the global crypto crash. 

The industry has been in talks with the government for months now regarding the 30% tax and additional 1% TDS. Experts have been strongly criticizing the move as it was seen as a major deterrent for those involved in crypto trading.

The TDS has been seen as a burden for both, the customer as well as the government, as it involves seeking a tax refund at the end of the financial year for each time the TDS has been deducted.

This move comes at a time when the crypto industry is facing dwindling transaction volumes for the last two months. Starting April, Indian exchanges saw a significant drop with 30% tax being implemented. 

Moneycontrol earlier reported that transaction volumes plunged by 55 percent while domain traffic dropped by 40 percent on India's top cryptocurrency exchanges in the first two days after the crypto tax came into effect. Currently, experts say that the drop is over 90%. 

The TDS was the key reason for the drastic drop in volumes and was expected to wipe out volumes further once it came into effect. With this new announcement, it remains to be seen whether volumes slowly return to exchanges.  

The industry overall has been facing a bearish market after it has gone into a freefall and experts say that this bear market will last for 12-18 months more. Further, some banks including Kotak Mahindra Bank have withdrawn support from crypto exchanges, leading to a reduction in payment method options on platforms. This was a domino effect after US crypto exchange Coinbase was forced to hold off from having the Unified Payments Interface (UPI) on its platform.

Moneycontrol had reported that the move by banks and the National Payments Corporation of India which operates UPI was more out of disquiet arising from Coinbase’s very public announcement.

To add, the crypto industry is also looking to have a dialogue about the Government as the Goods and Services Tax (GST) Council which may put cryptocurrencies and related services under the 28 percent tax slab.