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India's crypto community has been bracing for a highly controversial provision of India's next crypto tax regime – the 1% tax deducted at source (TDS) – to take effect for over three months. The tax starts to be levied today anytime an Indian buys or sells crypto.
The tax has become effective Friday, July 1, setting the stage for a test – a predicted negative impact on crypto adoption and the market. Calculating the impact of the tax will be a wait-and-watch game at a time when the global investment community is facing a slowdown.
What's the tax?
The 1% TDS liability is the second major provision of India’s recently introduced crypto tax law. Another provision, which enforces a 30% capital gains tax on all transactions, took effect on April 1.
TDS is a liability imposed on the exchanges that deposit taxes on behalf of sellers on their platform. It will be calculated at 1% of a transaction's value. The seller would be able to offset the 1% TDS from his or her total tax liability of 30%.
The government must be notified of a transaction within 30 days from the end of the month in which the transaction is made and any sum deducted must be paid to the government within the same time frame.
Transactions of up to INR 50,000 ($640) in a year are exempted from the rule of 1% TDS for certain categories of taxpayers.
Other procedural specifications have been detailed here.
In a notice issued on June 30, the government announced that there is no need to pay 30% tax and 1% TDS on some NFTs and digital assets.
The exemption includes digital gift cards or vouchers for the purchase of goods or services or those to avail discounts on goods and services.
Mileage points, reward points or loyalty cards, without direct monetary consideration under an award, benefit, loyalty, incentive, rebate or promotional program have also been excluded. The same applies for subscriptions to websites or platforms or applications.
NFTs of tangible assets, like land records, have also been excluded for all taxation purposes.
Why the 1% TDS is controversial
When the crypto tax rules were first announced as a proposal on Feb. 1, 2022, there was uproar from India's crypto community. Their biggest bone of contention was the 1% TDS.
They argued – and continue to believe – that the 1% TDS is too high, and could kill trading volumes, increase an already high level of brain drain and make tax collection and understanding extremely cumbersome for both industry and retail traders, effectively scuttling the growth of an industry that was just taking off.
Over the next two months, representatives of the crypto industry met and pleaded with government representatives to at least take back this specific provision.
Sumit Gupta, co-founder and CEO at CoinDCX, initially one of India's most known and largest exchanges but now a "crypto investment app," tweeted to say this tax "would do more harm than good." He said developers and entrepreneurs might flee to friendlier jurisdictions, and said a 30% taxation rate coupled with 1% TDS is "unfair."
On the other hand, India's finance minister Nirmala Sitharaman argued "that the government is taxing crypto because people are profiting from it," and that the goal is to "check the source and trail" without legitimizing crypto.
"Regulations are good for the crypto industry and a definite positive step. However, 30% taxation and 1% TDS is unfair. Would humbly urge the government to reconsider the % of TDS and tax. Onerous taxation and TDS is proving to be a major hindrance to the growth of this industry. The objective of tracking transactions and transparency can very easily be achieved in other ways too," tweeted Gupta.
When the proposal became law on April 1, Nischal Shetty, CEO of one of India's biggest exchanges, WazirX told CoinDesk, "we have entered a period of pain."
"The 1% TDS will kill liquidity, which means ultimately profitability goes down for everyone. It's a lose-lose," Shetty said.
Within days of the 30% tax taking effect in April, trading volumes collapsed, in some cases more than 70%.
Hours before Friday's new tax became effective, exchanges announced system shutdowns due to TDS implementation, indicating how retailers and the industry both will have to streamline tax collection processes which they argue are tedious.
The days leading up to July 1 have seen "1% TDS" trending on Twitter. Crypto exchanges and influencers have been hosting educational forums and debates to shine a spotlight on the guidelines of the "harmful" tax.
Opposition vs. government/central bank
As 1% TDS trended, an old video of an opposition Minister of Parliament, Ritesh Pandey who called for ending the 1% TDS, gained traction.
“In our country, where so many unicorns are emerging, with this regulation, you (the government) are strangulating all the crypto transactions,” Pandey said.
“The people in the 18-25 years of age are invested heavily in this (crypto and other VDAs), and the TDS is effectively ending their ambitions and innovation. I request the government to remove the 1% TDS from all crypto transactions,” the young MP said.
A few days ago, the Governor of India's Central Bank, Shaktikanta Das said cryptocurrencies are a clear danger, arguing that anything that derives value based on make-believe, without any underlying, is just speculation.