The government decision to tax cryptocurrency in the 2022 Financial Budget by Finance Minister Nirmala Sitaraman has now being implemented by crypto exchanges on their platforms.
In the budget, the minister announced two new taxes, a 30% crypto tax on profits and a 1% transaction tax.
The 1% tax deducted at source (TDS) will only be paid by the seller. There will be no TDS on buy, limit buy, and earn orders.
When a sell order is placed, the user can see how much TDS is deducted. When the sell order is executed, the user can check the exchange fees and TDS that will be deducted.
The 1% TDS is seen as detrimental to the growth of the crypto sector in India, as users will keep paying taxes, and the return on investment will be less.
Now let’s understand which are the scenarios of 1% TDS
The Indian government in the Budget said “Virtual digital assets (VDA)” were the same as crypto and NFTs if sold for INR or swapped for another crypto.
Scenario 1: No TDS will be deducted from the buyer on buying Crypto using INR, while the seller of the Crypto asset would be liable to pay TDS.
For example, if a buyer purchases a crypto coin for INR 1000. The seller will get only INR 999, after the deduction of 1% TDS, however, the buyer will get the complete value of cryptocurrency.
Scenario 2: If a crypto asset is bought by paying with another crypto asset, i.e., swapping one crypto asset for another, the TDS would be payable on both sides.
For example, if 1 crypto coin is sold for 1000 USDT. The crypto coin seller receives 1000 USDT by paying 1.01 ETH. After a 1% TDS addition, the buyer will only receive 0.99 ETH coins after a 1% TDS deduction.
Scenario 3: If a user opts for peer-to-peer (P2P) trades. 1% TDS would be deducted when the seller placed an order to sell USDT in this case. And no TDS will be paid by the P2P USDT buyer.
Before the TDS rules were implemented, even the Central Board of Direct Taxes (CBDT) clarified how it would work.
The tax board said that exchanges will have to file quarterly statements furnishing all TDS transactions in the prescribed Form 26QF and before the due date as specified.
Who will pay TDS?
The CBDT stated that anyone who buys cryptocurrency or any VDA will have to pay 1% of the value (individual or exchange).
In a circular, CBDT said, The newly added section called 194S which was added in the Income Tax Act, 1961 mandates a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA), to deduct an amount equal to 1% of such sum as income tax thereon.
Citizens who live in India are subject to the law. Non-resident Indians (NRIs) are subject to TDS only if they purchase VDAs from an Indian, although there won’t be any TDS if they do so indirectly through another NRI.
Who doesn’t pay TDS?
CBDT said that TDS deduction is not necessary for Specified Persons & Others under Section 194S of the Income-tax Act of 1961.
According to CBDT, for Specified Persons, TDS is not required to be withheld when dealing with VDAs. This is because the transaction value or the cumulative total value for the financial year is less than INR 50,000.
Explaining who comes under the Specified Persons, CBDT said that, “a person or Hindu unmarried family (HUF) who receives no income within the category of profits and gains from employment or business.
A person or HUF with income falling under the category of ‘earnings and gains from business or profession. However, whose annual gross receipts, sales, or turnover from such business do not exceed INR 1 crore or INR 50 lakh in the case of professionals.
The CBDT circular said that it would however examine all of the aforementioned financial caps for the fiscal year immediately preceding the financial year in which the said VDA was transferred.
For Others: Under this, any person dealing with VDAs which does not exceed INR 10,000 in a financial year need not pay any TDS.
On direct cash transfers?
If users are dealing in a peer-to-peer trader, the buyer of cryptocurrency will deduct TDS as described in this section for peer-to-peer transactions, according to CBDT (194S).
Exchange-based cash transfers?
According to CBDT, in this scenario, buyers would be crediting or paying the exchange (directly or through a broker). The crypto exchange would then be obligated to either directly or through a broker, credit or pay the owner of the VDA that is being transferred.
If VDA is transferred through an exchange not owned by the VDA owner, it is the cryptocurrency exchange making the payment for the sale to the VDA owner. This exchange is responsible for deducting the TDS.
If the broker owns and sells the VDA, TDS will be deducted by the cryptocurrency exchange before the sale revenues are transferred to the broker.
When a broker, who is not the seller, facilitates the P2P VDA transaction between the exchange and the seller: Both the broker and the cryptocurrency exchange are accountable for deducting TDS on P2P VDA transactions.
When a broker who is not the seller only acts as a middleman between the crypto exchange and the seller in a P2P VDA transaction, both the broker and the crypto exchange are responsible for deducting TDS.
On direct transfer without cash?
The buyer must request proof of tax paid from the seller, such as a TDS invoice if two VDA owners trade their own VDAs.
The buyer must release payment after receiving this documentation, according to CBDT’s clarification.
Therefore, in order to exchange VDAs, both parties must pay tax with regard to the transfer of the VDA and provide proof to the other party.
The TDS statement would then need to include this information along with the challan number. This year, requirements for reporting such transactions were included in Form No. 26Q which has been introduced for specific individuals, according to CBDT.
Non-cash transfers through exchanges?
The exchanges will have a written contract stating that they will pay the tax alongside the buyer or seller.
In this transaction, TDS must be paid by both parties. Exchanges will need to provide an explanation of this information in Form 26Q.
5% TDS for citizens not filing tax returns
The government under Section 206AB of the Income Tax Act, 1961 has set a 5% penalty for any person who has not filed an Income Tax return for the past two years on all crypto-related transactions.
So, if a user is not filing a return, file it soon, or pay 5% tax on each transaction. All the payments of TDS will be in INR and deducted at the source of trading.
Many crypto exchanges have already embedded the TDS deduction in their platforms, as they are the ones that will send the TDS to the government on users’ behalf.
Trading volumes nose dive after TDS comes into effect
Following the implementation of 1% TDS, all crypto exchanges have reported a decrease in trading in the range of 70% to 82%.
There has been a negative effect on crypto trading, as spot volumes on cryptocurrency exchanges CoinDCX, WazirX, and Zebpay decreased by at least 70% in the first week of July, as compared to the week ended June 30. During the week, WazirX, owned by Binance, had the highest trading volume decline of 82%, CoinDCX by 70%, and ZebPay by 76%, according to cryptocurrency research and consulting firm Crebaco.
According to cryptocurrency exchanges, the exact value of TDS cannot yet be determined, but crypto industry observers anticipated that pressure on trading will certainly persist for the time being.