Amid the ongoing discussions between cryptocurrency stakeholders and the government to reconsider the 1 per cent TDS (tax deducted at source) to be charged on all crypto asset transactions, Nischal Shetty of crypto exchange WazirX argued that this would lead to excess money getting pulled out of the ecosystem, “crippling traders and preventing them from further trading activities due to the lack of capital”.

Through a series of tweets on Wednesday, Shetty, founder and CEO, WazirX, demonstrated how going by last year’s numbers, 1 per cent TDS being charged on every transaction will end up costing the government a lot more, as it will have to create the mechanisms to return up to $900 million to traders in tax returns next year.

According to him, on average, the Indian crypto industry witnessed trading volumes to the tune of $100 billion in 2021, and charging and holding back 1 per cent of this would amount to $900 million, which will be stuck with the government for nearly a year before it gets refunded to the traders or citizens.

“The TDS levied would block the trading capital and, thereby, discourage fence-sitters and potential traders and investors. Not only does this minimise our chances of making India a crypto knowledge-hub and a global leader of digital assets in the future, it would also require the government to refund the 1 per cent TDS since it is not based on the profits. Consequently, it would be deemed as a loss of revenue in the form of income taxes,” said Shetty.

Meyyappan N, Leader, Digital Tax, Nishith Desai Associates, concurred and told BusinessLine: “If you are charging 1 per cent on every trade or transaction, that’s not reflecting the reality. You pay income taxes only on the net gains you make. As demonstrated in Shetty’s tweet, it doesn’t add up. You will end up collecting a lot more TDS than the actual taxes due, which means in the end of the year, like any salaried income or TDS you have deductions and you have to file and then you claim the refund of excess tax deducted.”

He added: “What Shetty said is right because of the high TDS deducted by the government, they are actually sucking the liquidity out of this system. Then there are challenges in getting refunds causing cash flow issues coming back to the system. Meanwhile, trading volumes will suffer. And in opportunities of trading more, there is a chance of people making more profit and paying more actual taxes as opposed to just sucking money out through TDS.”

The solution

Separately, Shetty said that profit being taxed directly through income tax generates good income for the government. He added that last year, total crypto assets held by Indians amounted to $3 billion. If out of this, 10 per cent was assumed to be net profit made by traders, that will account for a total of $300 million, which when taxed at 30 per cent, will bring in $100 million in revenue for the government through income tax.

To solve the TDS issue, Shetty suggested: “The alternative solution to this challenge would be the imposition of a reduced TDS, say 0.1 per cent. This would give impetus to the profit-generating capacity of the investors and free their capital, as well as significantly minimize the refunds by the government. In addition, the higher profits would also enable the Govt. to earn more and propel India towards a $5 Trillion economy.”

“The additional 1 per cent TDS on crypto trading could have the reverse effect and regress the sector in India. Besides creating a substantial barrier to the adoption of crypto, it would also be a deterrent to the Web3.0 ecosystem in India,” he said.

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