User protection and tax compliance can co-exist. A lower TDS can provide the government with the required tax trail without locking up the users’ capital. A higher TDS does not increase tax compliance, instead, it could drive away users from KYC-compliant platforms to the grey market.
Crypto assets are not independent of the underlying blockchain network. Just like public companies have tradable assets offered to retail investors in the form of equity, public blockchains have tradable assets in the form of crypto assets.
The crypto market is driven by high-frequency traders, like intraday traders in equity markets. These traders operate on extremely thin margins, and locking up their capital with high TDS will restrict their ability to operate.
Further, a flat 30% tax that does not differentiate short-term capital gains from long-term gains, with no provision for deducting expenses incurred or offsetting losses is not in tune with the tax framework for other asset classes and is discriminatory.
The industry has also not yet received the clarifications it had sought on the implementation of tax proposals, and this ambiguity may result in operational obstacles. It is the need of the hour that the government issue these clarifications before the TDS comes into effect on July 1, 2022.
Such provisions are a deviation from other asset classes, and it is unfortunate that the Govt has taken this approach despite the Finance Bill defining cryptos as “virtual digital assets”.
A cohesive tax framework would encourage users to diversify their investments across asset classes, thereby promoting financial discipline. To further safeguard users, exchanges and platforms could be subjected to regulatory standards on operations, compliance and security. This will allow the industry to progress and crypto users to continue to benefit from their investments.
Indians have already invested more than $6 billion in cryptos, and prohibitive taxes are likely to unsettle these investors, expose them to possible losses, and possibly drive them out of an industry building the future of the internet in India — for Indians and the world — in pace with the government’s mission of Atmanirbhar Bharat.