Earlier in February, India’s Finance Minister Nirmala Sitharaman announced a tax proposal that would put the relatively unregulated region of digital assets under the responsibility of the tax authorities.
The offer includes a 30% withholding tax on crypto income and a 1% withholding tax (TDS) on crypto exchanges on transactions over INR 10,000 ($133).
Announced during the 2022 budget session of the European Parliament, the government has already set April 1 as the deadline for cryptocurrency exchanges to comply with the new tax rules.
A tax on cryptocurrencies has been widely misunderstood as a form of legal recognition of cryptocurrencies in India, an idea that the head of the country’s central government has rejected with regard to direct taxes.
Seetraman repeated a similar position in Parliament a few days later, saying that the government would only tax profits from digital assets and would in no way give them legal recognition. The legality of the cryptocurrency market will be determined later, after the appropriate legislation is presented in Parliament.
30% of cryptocurrencies do more harm than good
The 30% cryptocurrency tax category is the highest in the country and almost double the 16% corporate tax rate. The announcement sparked mixed reactions from the crypto community in India, with exchanges calling it a welcome step towards a certain level of recognition for the unregulated crypto market, while many cryptocurrency traders described it as bearish.
Representatives of Indian cryptocurrency exchanges met with senior politicians from the Ministry of Finance to appeal to the government and demand it review the proposed tax rules.
According to The Economic Times, industry leaders have tried to explain that 1% TDS can scare away small traders and also lead to the transfer of assets to foreign exchanges. Representatives also noted how difficult it is to collect withholding taxes on transactions from foreign exchanges without tracking data. Discussions at the meetings revealed various problems with setting fees without clear rules.
While taxes are not legal recognition of cryptocurrencies, Sumit Gupta, co-founder and CEO of Indian crypto exchange CoinDCX, told Cointelegraph that the proposal was a milestone that further legitimizes the digital asset markets. Gupta said of the high tax tier and its complexity:
“There has been some discussion regarding tax rates of 30%, with some suggesting that too much could stifle innovation in the sector and act as a barrier to digital finance investors and users.”
He added: “In addition to the high tax rate, there are still clarity gaps, especially when it comes to tax cuts at source. The specific sections of TDS remain opaque, hindering the broader use of cryptocurrency. While progress in crypto is encouraging, we must remember That this is only the beginning of the crypto journey and we look forward to further developments on the regulatory front that will support and support the growth of funding in the future.
Some have argued that the tax proposal was announced haphazardly as the government wanted to tax profits, leaving businesses to bear losses. A high tax rate can deter small traders and make the market dominated by the rich.
Siddharth Sughani, founder and CEO of blockchain data analytics company Crebaco, told Cointelegraph:
“Such a tax system indirectly discourages anyone from entering cryptocurrencies because every transaction (broker/service fee) is subject to 30% tax, 1% TDS, 18% tax and service fee. This becomes a heavy burden on the pockets and difficult Compliance with it. Because crypto has thousands of transactions per user every month. Previously, before this structure was announced, many people paid taxes on income from other sources at the taxable rate. Losses persisted. Therefore, losses (if any) must be transferred.
Many countries around the world have been hit hard by retailers due to high taxes. South Korea had to delay its 20% tax proposal due to ambiguous regulations, while Thailand had to cancel its 15% tax proposal due to retailer failures. The Government of India would do well to take note of the changing systems around the world in order to create a balanced framework.