Crypto industry lobbying for streamlined taxation

Ahead of next month's federal budget announcement, the Indian crypto industry has made several suggestions to the government to streamline taxation to foster a level playing field between domestic and foreign exchanges and ensure sustained growth.

In a proposal by the India Web3 Association (BWA), the cryptocurrency body urged the government to expand the scope of tax deduction at source (TDS) obligations to explicitly include offshore platforms.

They also want the Indian government to lower TDS itself from 1% to 0.01% and bring capital gains tax at par with other investment assets to help restore volumes at domestic exchanges. “The high TDS introduced in 2022 has driven 97% of India's crypto digital asset volumes to overseas exchanges, hurting domestic businesses as overseas exchanges were previously able to avoid compliance,” said Kiran Vivekananda, director of BWA and chief policy officer at CoinDCX. DH.

Including them in the same purview as Indian companies will ensure a level playing field and ensure that Indians, who comprise the world’s largest group of cryptocurrency inventors, trade and invest only on compliant platforms, he added.

Income from investing in and trading in digital assets is currently taxed at 30%, which is significantly higher than the capital gains tax imposed on other assets, making them less attractive to Indian investors. Additionally, to keep a check on large transactions, a 1% withholding tax is levied on all cryptocurrency transactions above Rs 10,000. While the withholding tax is refundable on tax returns, it is also crippling investor liquidity as it is deducted on a per-transaction basis.

“High withholding tax rates and lack of offsets have driven many Indian virtual digital asset (VDA) users to trade on non-compliant foreign exchanges, exposing them to the risk of investment losses and legal violations. They also reduce tax revenues for the exchequer,” said Ashish Singhal, co-founder and CEO of CoinSwitch. The company has urged the government to allow offsetting and carryforward of losses on sales of VDAs and streamline income tax on these investments.

Leading exchange CoinDCX also separately urged the government to include proposals in the upcoming budget to “foster a more favorable fiscal environment and promote growth, innovation and fair taxation in the Virtual Digital Assets (VDA) space.” Apart from the BWA proposal, CoinDCX also urged the government to increase the TDS threshold from the current Rs 10,000 to Rs 50,000 to protect investor liquidity, while also seeking clarity on TDS applicable to trading activities carried out by exchanges on behalf of investors.

This comes at a time when financial regulators have put offshore exchanges under scrutiny. The Financial Intelligence Unit recently issued notices to nine exchanges, urging them to register as “reporting entities” and file returns with the Income Tax Department. This is a welcome move to ensure fair compliance requirements and has brought back some trading volumes for domestic exchanges, but it has significantly reduced much-needed liquidity, Vivekananda said, adding that it is a necessary evil to ensure safe industry standards. However, exchanges are keen for further clarity on these requirements.

“We advocate for streamlined and simplified reporting requirements that will enhance transparency and compliance. Clear guidelines and user-friendly reporting procedures will facilitate smoother running of cryptocurrency businesses,” said Satvik Viswanath, co-founder and CEO of Unocoin.