Crypto firms seek revision of TDS, leveling with other assets from Budget 2023

Cryptocurrency and NFT (non-fungible token) firms in India, which have seen a slump since the government-imposed taxes on the industry last year and the subsequent global market crash, are hoping for more favourable announcements from this year’s Union Budget.

Companies like CoinSwitch, ZebPay, and Rario are hoping that the tax deduction at source (TDS) on crypto will be revised in the upcoming finance bill. NFT firms, like Rario, have also said that a distinction between cryptocurrencies and collectibles may help the industry.

“India should incentivize users to stay within national jurisdiction by reducing the burden of taxes. If the TDS aims to establish a trail of crypto transactions, it can be achieved by a lower TDS rate of 0.1%,” said Ashish Singhal, CEO & Co-Founder of CoinSwitch, a crypto exchange.

Last April, India started charging a 30% tax on income from crypto transactions. This was followed by an additional 1% TDS (tax deductible at source) in July on the sale or transfer of digital assets.

The taxes were a major setback for the industry that was already reeling from an overall downturn in the industry and waning investor interest. It forced many to cut jobs and freeze new hiring. According to December 2022 data from crypto research firm CREBACO, trading volume on Indian crypto exchanges — CoinDCX, WazirX, and ZebPay — fell by 97% last year.

Coinswitch’s Singhal pointed out that 30% tax and 1% TDS without a provision to offset losses have decreased trading volumes. “It is making the markets illiquid, and investor sentiment is running low. Such circumstances push consumers’ money offshore into the grey markets, exposing them to regulatory issues,” he said.

Pratik Gauri, Co-founder & CEO of 5ire, a Blockchain startup, concurred that the decline of trading volumes by as much as 85-90% is “concerning.” He added that the “the fear of not attracting investments in the web3 innovative startups will impact the overall picture”.

To be sure, funds raised by crypto firms worldwide declined by 42% last year, according to a report from crypto researcher CoinGecko published last week. Firms raised $21.26 billion in 2022 down from $37.06 billion in 2021, showing a drop in investor interest worldwide, because of scandals surrounding crypto exchange FTX and crypto token Luna.

“It is vital to ensure that any taxation regime does not hamper the development of India's talent in web3 and the supercharged innovative environment India has been experiencing recently,” said Gauri.

The industry is also seeking similar protections for cryptos that are available to other assets such as stocks and bonds. Rahul Pagidipati, CEO, ZebPay, a crypto exchange, said clarity on taxation by reducing TDS and capital gains taxes and leveling them with other asset classes such as stocks and bonds will help the industry. He added that the government should also create a progressive regulatory framework.

India doesn't have a specific regulation or framework to govern cryptos at the moment. The Reserve Bank of India (RBI) has reiterated time and again that cryptos pose an inherent threat to the country’s macroeconomic and financial stability. RBI is in the process of rolling out a central bank digital currency (CBDC), on a pilot basis.

“All this will address the ongoing concerns and uncertainty about the industry by creating transparency and help industry players to protect users from any kind of black swan events like the FTX collapse,” said Pagidipati.

NFT platforms also want the government to have separate taxes for crypto-based NFTs and non crypto-based tokens.

“We sincerely also hope for a further revision in the definition of VDAs in the upcoming Finance Bill separating crypto-based tokens from non-crypto-based tokens and separate tax regimes for each. Our digital player cards are on a custom-made Rario blockchain, where we have no reliance on cryptocurrency whatsoever and they can be purchased only through fiat currency,” said Ankit Wadhwa, Co-founder & CEO, Rario, an NFT startup.

The 2022 Finance Bill defines virtual digital assets (VDAs) as any tokens generated through cryptographic means. It also identified NFTs as VDA.