India to Give Clarity on Tax Provision Within Two Months: Sources

The 1% tax deducted at source has been the biggest pain point in the new tax rules for India's crypto industry.

AccessTimeIconApr 28, 2022 at 7:33 a.m. UTC
Updated May 11, 2023 at 5:09 p.m. UTC

The Indian government will provide “procedural clarities” on tax deducted at source (TDS) within two months, said two people familiar with the matter.

The 1% TDS liability – which will take effect on July 1 – is the most controversial 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 enforced against the exchanges that deposit tax on behalf of sellers on the platform. It will be calculated at 1% of the transaction value. The seller would be able to set off this 1% TDS from their total tax liability of 30%.

The TDS mechanism is used to trace transactions and prevent tax evasion, according to the government.

Crypto businesses have repeatedly said the TDS is the biggest pain point in the new crypto tax legislation, with some even considering a legal challenge against the law.

It’s unlikely the government’s clarification will impact the discussions around putting up a legal challenge against the new crypto tax rules because the pain is more about the 1% quantum rather than the procedure.

“Procedural clarities” refer to how TDS will be calculated and how exchanges will share data with the government.

The industry is seeking clarity on two major points – trading and swaps of virtual digital assets (VDA). VDA is the Indian government’s terminology for all cryptocurrencies and non-fungible tokens (NFT).

In trading, exchanges usually match buy-sell orders through algorithms and execute them. Buyers and sellers are usually unaware of to whom they bought from or sold.

Anirudh Rastogi, founder and managing partner of Ikigai Law, the firm that represented crypto exchanges in a previous legal fight against India’s central bank, said it’s unclear what happens in a crypto to crypto trade – whether the buyer or the seller will be responsible for deducting the tax at present.

“Remember, the buyer and seller may never know each other or their nationality or have their PAN [an Indian taxpayer ID] or know the aggregate value of consideration received from transfer of VDAs,” Rastogi said.

The second major concern is VDA to VDA swap trades. This is when a trader exchanges one crypto asset with another. For instance, one bitcoin (BTC) is traded with another person who has another crypto asset such as four ether (ETH). Once again, it is unclear who the buyer would be, as well as, whether tax will be deducted in VDAs or fiat currency and how the cost of exchanges would be calculated.

Rajat Mittal, a senior tax counsel for India’s crypto businesses, raised the same concerns while also asking whether individual traders will need Tax Deduction account numbers for deducting TDS and how a 1% TDS would work in the case of leverage trading.

Internal discussions have already taken place within the finance ministry and tax departments and the government will have more information to share within one or two months, CoinDesk was told.


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Amitoj Singh is CoinDesk's regulatory reporter covering India. He holds BTC and ETH below CoinDesk's disclosure threshold of $1,000.

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