India’s new 30% tax on crypto income has upset investors, but exchanges worry about ambiguity concerning when and how a 1% tax on all crypto transactions has to be levied. 

A tax of 1% must be deducted by the buyer for all transactions of or over INR 10,000 (US$132.54) — or INR 50,000 (US$662.70) for specific individuals — and filed as tax on behalf of the seller. This tax applies to both crypto-to-fiat and crypto-to-crypto transactions. Since buyers do not have the necessary information to file tax on behalf of the sellers, the exchanges would have to step up to the responsibility. 

Indian cryptocurrency service providers initially celebrated New Delhi’s decision to place a 30% tax on crypto earnings, interpreting the move as the acknowledgement and legitimization of the industry by the government. But the fine but vague line, which specifies a 1% levy as tax deduction at source (TDS), is now the source of confusion for local crypto exchanges. 

If exchanges do become responsible for withholding the 1% tax, they would have a challenge in identifying if a seller is Indian as well as if he is liable to pay taxes in India, said Rahul Garg, managing partner at tax consultancy firm Asire. The income tax law lists several factors, including the number of days one stayed in the country, to determine tax liability. 

Foreign exchanges may have to set up completely different systems for the Indian market to identify Indian users and implement the tax. “When it’s a foreign exchange the volumes are high. They have customers across the world. How would that exchange implement this change from an India standpoint? How would they bifurcate and set up the systems for India related customers, to identify buyers and sellers?” Garg said.  

Besides, if foreign exchanges withhold taxes, it would increase their tax burden as they would be liable to pay 2% equalization levy tax. This is because crypto exchanges are treated as e-commerce businesses that are liable to pay the 2% tax.  

Moreover, exchanges are also confused about when to withhold taxes. In case of a crypto-crypto swap, the exchange could have to withhold taxes on both sides since there’s no clear buyer or seller and each party receives a currency. 

“This will lead us to valuation concerns in the case of withholding on crypto-crypto transactions, and there will be practical challenges in withholding and depositing tax in INR in such transactions,” Gupta said. 

Besides, exchanges are concerned that the 1% tax could also impact trading volumes, liquidity and market efficiency by discouraging arbitrage and margin trading, Sumit Gupta, CEO of crypto exchange CoinDCX, told Forkast in an email. Since daily traders make multiple transactions each day, the 1% tax levied on all transactions above the threshold will eat into their returns, making active trading unprofitable.

But the problem could be solved if the threshold for the 1% tax deduction is increased, Gupta believes. “From our perspective, a reasonable cutoff for the amount should be set at INR 2,50,000 (US$3,313.48) for [the 1%] TDS deductions,” Gupta said. 

Exchanges are approaching the government to shed some light on the gray areas. “We are seeking further clarity on which point in time does the exchange have to withhold TDS and if so, exchanges need clarity in order to align operational challenges, for example, to change to a dual wallet system or collect INR from users to discharge TDS,” Gupta said.

But even if the exchanges did get clarity, they believe that the operational changes required to implement a system to withhold taxes cannot be achieved before the scheduled implementation of the tax on April 1, 2022. 

“Adjustments to the timeline will benefit consumers and the industry as a whole, as the current timeframe we are working with for these far-reaching changes is too short and hence unviable,” Gupta said. 

Garg believes the tax proposals were pushed out in a rush without “enough consultation” with the industry because of demand from various industry bodies, and is therefore at “a very nascent stage.” Going forward, Garg believes the government will actively enter into discussions with industry experts to figure out the details. 

More mature legislation on crypto will bring forth more clarifications and may even lead to lower taxes as the government brings its crypto tax in line with other asset classes, Garg said.