Tax on Crypto in India – What it means for investors?

Both TDS as well as high tax regime for crypto investors in India are an indication to hold back people from entering the market.

Tax on Crypto Currencies
Tax on Digital Currencies

Union Finance minister of India, Nirmala Sitharaman on March 25 announced a decision to impose a 1% TDS (Tax Deducted at Source) on the transfer of digital assets along with 30% income tax on any capital gain in digital assets.

This she believed will help the government to track the transactions in the cryptocurrency sector. She further added that it is not an additional burden on the investors as any extra tax paid by a person in advance can be claimed back at the end of financial year.

Though for some, Sitharaman’s proposals have removed uncertainties that were hovering over crypto trade as investors were fearing out-and-out ban on crypto activities.

However, this didn’t gel with the sentiments of the investors as they have plenty of points to counter the government on the same.
To understand their woes, let’s first check what is TDS?

Generally, any person who is receiving any kind of income is liable to pay income tax. But as per the provision of TDS, a certain amount of tax is deducted by the source making payments and is deposited with income tax department.

So the recipient receives payments after the deduction of TDS. But at the end of fiscal year, the person calculates his tax liability as per his gross income and TDS is adjusted in the total tax due. If the TDS exceeds the total tax due towards a person, it is refunded back to the person.

TDS deductions are linked to PAN numbers of both the deductor and deductee. It is mandatory for a person deducting TDS to procure Tax Deduction Account Number (TAN) and refer it in all TDS transactions. The exception to the case where PAN instead of TAN can be used to deduct TDS are – on purchase of land and building under Section 194-IA, on rent as per Section 194-IB, and on payment of certain sums by Individuals or HUFs as per Section 194M.

However, all these transactions are not the ones in which any person indulges on daily basis. You may sell a property once in years, rent is collected on monthly or yearly basis.

So coming back to the case of digital assets, the transactions between any two parties materialize without any trusted third-party intermediaries or a bank. So, when it comes to TDS deduction all the participants will bear the responsibility to deduct TDS. This whole process will complicate the balance sheet of a crypto investor and things may become messy over a period of time.

The second major concern among the investors is the rate of TDS. If TDS will be paid for all the transactions, then after 100 transactions, more than 50% money will be parked as TDS. This will not only affect liquidity in the sector but also the purchasing power of the traders. The investors opined that the government should have reduced the TDS rate if the sole purpose is to keep a track on investments.

Both TDS as well as high tax regime for crypto investors in India are an indication to hold back people from entering the market. The intentions of government are in the better interests of the citizens.

Will government succeed in curtailing the investments to keep a tab on tax evasion, money laundering and other illegal activities? Or Will the investors move to the areas which are liberal in their taxes? The direction that cryptocurrency sector in India will choose will be evident in the near future only.

It is to be noted that India is not alone in discouraging its people from investing recklessly in Crypto currencies and assets. Recently, European Union Parliament also passed rules mandating disclosure of identity of persons trading in Cryptocurrencies.

All over the world, countries are vary of allowing free hand to its citizens to invest and trade in digital currencies which have no status of legal tender. However, Dubai has taken a lead in this regard by constituting a Virtual Asset Regulatory Authority to regulate transactions in Cryptocurrencies.