Transaction tax

An impractical tax | The financial express

By Rameesh Kailasam & Madhabi Sarkar

India’s economy has remained resilient and relatively insulated from the global financial turmoil, buoyed in part by the wealth and livelihoods created by Indian industry as well as start-ups across all sectors. Technical innovations have enabled the creation of fundamentally powerful new financial platforms, and India is well positioned to be a leader in this burgeoning new fintech industry. Among recent technical innovations particularly relevant to financial technology, blockchain and distributed ledger technology (DLT) stand out and continue to emerge as revolutionary and reliable instruments that enable discreet, transparent and secure execution of financial transactions. and others.

However, India’s high taxation on cryptocurrency transactions seems to be becoming a boon for overseas exchanges, as Indian users seem to prefer transacting on these exchanges to avoid paying withholding tax. at source (TDS) of 1% levied on these transactions, making the tax fruitless in a sense. This runs the risk of a deterioration in the visibility of transactions for the whole market, apart from the potential flight of capital to foreign stock exchanges.

According to industry estimates, there has been a reduction of around 85% in monthly volume on Indian exchanges since February 2022, while international trading volumes have maintained fairly steady growth for the same period. Overseas exchanges saw high trading volumes and an increase of 77% for their most liquid trading pair between June and July, while it is estimated that there was a decrease of around 90% of the volume of rupee pairs on Indian exchanges. This, in turn, has created an arbitrage opportunity where market participants can seek to trade virtual digital assets (VDAs) overseas, via P2P or other means of substitution.

India was consistently among the top five countries for overall crypto adoption, according to data analyzed directly from various VDA chains. It also means that India already had a large online P2P market. Estimates of the number of individuals using VDAs in India indicate a very large number of Indian individuals who have ever invested in or use VDAs. Unless users and funds are incentivized to flow through visible and compliant exchanges, an information deficit on the number and activity of local users will always exist. The 1% TDS further exacerbates this problem.

The estimated opportunity cost to both Indian exchanges and the Indian economy is estimated at over Rs 3 trillion in annualized volume transferred to overseas exchanges that would otherwise have been conducted in India. This change is estimated to represent a potential gross loss of around Rs 500 crore in terms of commissions and GST collections that would otherwise have remained in the Indian economy. Several prominent Indian Web3 start-ups appear to be exploring the process of moving their offices outside of India.

The migration of Indian users to overseas exchanges defeats the basic purpose of the TDS mandate as their transactions are not tracked and there is a huge likelihood that these users will not pay any tax at the end of the year. All of this could potentially frustrate the main purpose of the provision to keep traceable records for all VDA transactions made by Indian residents, which was intended to address government concerns about violations of FEMA and the Anti-Money Laundering Act. money (AML). Trading on foreign stock exchanges without any tax seems to incentivize Indian users to transfer their wealth to foreign stock exchanges and undertake P2P transactions. The provision somehow discourages VDA trading and becomes a pattern of money movement that can be difficult to trace. Furthermore, India’s stock exchanges which contribute to nation building in several ways including taxation, employment, wealth creation and maintenance of the web3 ecosystem are the only ones bearing the brunt of the mandate. expensive tax.

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Ideally, the rate of applicability of TDS for traceability purposes would have been 0.01% instead of 1%, as this would have ensured that transactions would remain in India. The non-applicability of TDS on overseas exchanges and P2P deals has further made it lucrative for people to look outside. had previously recommended 0.01% TDS or Securities Transaction Tax (STT) as in equity trading and even an income threshold based taxation model for those investing in equity. cryptography. There is also a need to enable ease of doing business for young crypto-enterprises and encourage start-ups in the sector.

Given that large numbers have now moved to overseas exchanges, and in an effort to have a level playing field, there is no longer any choice but to recommend establishments Permanent (EP) for overseas exchanges who deal with customers domiciled in India.

The imposition of high direct taxes and burdensome compliances through the GST prepares fertile ground for online businesses in all sectors to be based overseas and still sell to the same customers in India, as we do. have seen in the past in different business segments of the online space. A similar approach for sectors like VDAs will encourage foreign companies and foster money laundering transactions besides hurting Indian-domiciled start-ups in that space besides stifling local innovation in India.

As countries develop their own frameworks in addition to collaborating with organizations like the FATF, the OECD is also working to give a final framework to the cross-border reporting framework for crypto assets. The Crypto-Asset Reporting Framework (CARF) recommended by the OECD, which covers exchanges, ATM operators, brokers and contemplates the automatic collection and exchange of transaction information for crypto-assets relevant, can address the concerns to a large extent.

India is rightly placed today in a connected world to take a leap into the blockchain and crypto space, and foster the next global giant from its shores. A level playing field has always been a concern for Indian start-ups across all sectors, and addressing these issues at the earliest is essential. It is essential that India does not push this company under the radar through heavy taxes and compliances.

The authors are Respectively, CEO and Senior Executive (Public Policy),