Indian Crypto Tax Crushes Trade Volumes on Indian Exchanges

The Ramifications of the Ill-Planned Indian Crypto Tax

Twenty-two months ago, Bitcoin was trading at its highest level, but after falling 70% from its record highs in November, the cryptocurrency is now trading at its lowest level in 18 months. The crypto market is notoriously volatile and is down from a peak of $2.9 trillion, Overall the crypto market capitalization has fallen to $914 billion. Globally, crypto exchanges are trimming their costs and laying off hundreds of employees as trading volumes take a major hit.

While the government of India disregarded the demand to lower the TDS rate to between 0.01%-0.05%, the Central Board of Direct Taxes came out with long-awaited clarifications over the applicability of tax deducted at the source. Section 194S was inserted in the Income Tax Act through Finance Act 2022. This mandates that 1% TDS be deducted from the value of digital assets like cryptocurrencies.

The Central Board of Direct Taxes on 22nd June 2022 clarified that in a peer-to-peer (direct buyer to seller) transaction of virtual digital assets, the buyer—the person paying the consideration—would be required to deduct 1% tax under section 194S of the Income-tax Act. Finance Act 2022 inserted a new section 194S in the Income-tax Act, 1961, with effect from 1st July 2022. The new section mandates that a person paying by way of virtual digital assets (VDAs) or crypto assets to deduct TDS at the rate of 1% of the consideration.

However, while the Finance Act 2022 of India has brought clarity concerning the levy of income tax on crypto assets, there was some confusion over the application of TDS on crypto transactions.

In the case of deduction of TDS on crypto transfer through the exchange the buyer will have to deduct the TDS. However, there may be cases when the buyer would not know whether the exchange is the owner of the asset or not. To remove any confusion in such cases, the circular said that as an alternative, an exchange may enter into a written agreement with the buyer or their broker that in regard to all such transactions the exchange would be paying the tax on or before the due date for that quarter.

Change in Volume on Indian Exchanges Due to 1% TDS

Spot trading volumes on crypto exchanges CoinDCX, WazirX and Zebpay declined by at least 70% on July 3 compared to June 30, even as the rule requiring deduction of tax at source on every transaction came into effect on July 1. Volumes on WazirX were down the most at 82%, according to data sourced from crypto research and consulting firm Crebaco. The decline was almost 70% on CoinDCX and 76% on ZebPay.

While crypto exchanges say it is too early to know the actual impact of the Indian crypto tax and TDS as trading volumes are typically lower on the weekend, some experts said trading would likely remain under pressure.

Conclusion

There has been a fall in trading across the industry as investors shift to hold and there may be another dip as traders see their capital getting locked while trading on KYC-compliant Indian exchanges. Rajagopal Menon, vice president at WazirX, said,

"At present, it is still premature to predict the ramifications of TDS. We will be in a better position to understand this by the second week of July.”

Industry insiders expect the decline in trading activity to worsen by the bear market due to ongoing global macroeconomic conditions, coupled with the Indian crypto tax. Meanwhile, some day traders said that the grey market would continue to flourish in this scenario and they would try different models to see if staying on Indian exchanges would be profitable.