TDS on crypto transactions comes into effect, exchanges brace for implementation hitches

A 1 percent tax deducted at source (TDS) on virtual digital assets took effect on Friday, July 1, posing a logistical nightmare to crypto exchanges that have the onus of meeting TDS requirements on behalf of customers. 

 The move, on top of a 30 percent income tax on profits made on digital investments, has been seen as a setback to Indian crypto exchanges. 

 After a blockbuster year for crypto trading as Indian crypto exchanges enlisted millions of buyers by the end of 2021, there has been a dip in volumes since the first week of April, after the government implemented a 30 percent tax on virtual assets.  

Cryptos are now taxed on par with gains from speculative activity such as gambling, and lotteries, putting digital assets in the highest tax band. 

 Since Finance Minister Nirmala Sitharaman announced the 1 percent TDS and income tax on gains from virtual digital assets (VDAs) including cryptocurrencies in this year’s budget, the industry has been worried more about the former than latter. 

 Execution challenge  

 With TDS finally taking effect, execution for exchanges remains a challenge, experts say. It entails a TDS cut on every transaction. 

 The purpose of levying TDS on crypto transfers is to capture the details of all transactions related to VDAs. A clarification was issued by the Central Board of Direct Taxes (CBDT) on June 22 on how the system will work. The onus of paying TDS will be on the buyers, crypto exchanges and brokers, the Board said, giving the crypto ecosystem just about a week to adjust to the new system.  

“We will deduct the advance tax as per the rules and provide users with a transparent invoice breaking up the deductions and fees. Further, every quarter, we will provide users with a TDS report detailing all the deductions for the three months,” a Coinswitch spokesperson said. 

“These documents will simplify the process for users at the end of the financial year as the income tax rules allow individuals to adjust the TDS deductions against the overall tax liability,” he added.  

CBDT has notified that the TDS collected under Section 194S shall be deposited within 30 days from the end of the month in which the deduction has been made.  

The TDS will be applicable to transfers of all VDAs– cryptocurrencies, non-fungible tokens (NFTs), and so on – worth over Rs 10,000. The onus of withholding the TDS lies with the person making the payment to the seller — it can be a buyer, an exchange or a broker. 

That means TDS needs to be cut from the selling price and after the deduction, the rest can be paid or transferred to the seller. 

Last-minute clarifications 

Experts say some things are still unclear. For instance, if a user is routing a transaction through an international exchange, what can one do?.  

“Usually, if it is not an Indian exchange then they have to get a Personal Account Number and a tax-deduction account number for witholding purposes which takes time. As per cases in the past, there has been room to argue that such withholding provisions should not apply to foreign entities,” said Indruj Singh Rai, partner at Khaitan & Co.  

He added: "The clarifications are surely end-minute because the exchanges had not prepared for it earlier. It is good that they are setting out whose obligation it will be. But feasibility and practicality of implementing this is going to be challenging.”  

 Adding to their burden, it is difficult for exchanges to ascertain if a user is Indian or not, Rai said.   

“It is surely an obligation on the exchanges and they may not have the ability to go after the users on indemnity etc. They may just follow an approach to use the IP addresses of users to know where they are trading from. However, that can be misleading too.” 

Dampening customer sentiment 

A senior executive at an Indian crypto exchange said: “There will be challenges on the execution, because of the short time frame we got after clarifications. You will see some logistical issues which can happen in any new implementation.” 

He added that while volumes will be significantly impacted, high frequency traders have already started trading on international exchanges. 

“However this is good for the ones who just want to invest. It gives complete clarity to them and they form the majority of users,” he added.  

Archit Gupta, founder of Cleartax, which now does crypto taxation too, said: “TDS regulations are expected to dampen customer sentiment in the initial few days as investors still don’t have enough clarity as to how these provisions will work. Exchanges can be expected to renew/modify existing customer agreements. Exchanges may also have to offer investors an understanding of how balances in wallets are impacted due to TDS and would also benefit from offering customers a full profit and loss view along with tax implications on transactions.”  

“Investors may also have to think about advance tax implications and assess tax dues on a quarterly basis.” 

In the face of a bear market and a funding winter, crypto exchanges face a long haul ahead.