India should consider lowering TDS rate on cryptocurrency trading to stem capital flight, users say: report

India should consider lowering the TDS by 1% on cryptocurrency trading as a high rate causes capital and user flight to platforms in foreign jurisdictions and the gray market, according to a report released Tuesday.

Chase India and Indus Law’s “Assessment of the Impact of 1% TDS on VDAs” report states that crypto platforms/exchanges should also perform customer due diligence, which can help uncover any potential future risk.

“The existing 1% TDS on crypto trading, combined with the lack of comprehensive regulations, is causing a flight of capital and users to platforms in foreign jurisdictions and the gray market,” he said. declared.

The government, from April 1 last year, introduced a 30% income tax plus a surcharge and tax on the transfer of virtual digital assets (VDAs), including cryptocurrencies, such as Bitcoin, Ethereum, Tether and Dogecoin.

Additionally, to keep an eye on the money trail, a 1% TDS has been introduced on payments above Rs. 10,000 to virtual digital currencies.

“The purpose of TDS is to establish a trail of crypto transactions, and the same can be achieved by a lower TDS rate. A nominal TDS rate would also support transaction tracking and tracing, making it easier to collect taxes if Indian investors continue to trade from Indian KYC-enabled platforms,” says the report, which was released days ahead of the 2023-24 Union Budget due on February 1.

He also suggested that for security and surveillance purposes, the government should require all crypto exchanges/platforms to perform detailed e-KYC authentication on all investors/traders in accordance with Aadhaar rules.

In the joint report, Chase India and Indus Law also stated that many stock exchanges failed to follow the said TDS rules despite falling within the legal jurisdiction and mandate to conduct business under other Indian laws and regulations. .

Many exchanges have been found to exempt this in their trading practices with unauthorized discretion. This loophole has thus led to a systemic “grey market” scenario of such stock exchanges from the close of taxation, he said.

In its recommendation, the study said: “Each exchange/platform must provide and should be mandated for the submission of transaction records to the tax regulatory authority. This would help the tax authorities (CBDT) to create a repository “valid” exchanges that follow the TDS standard.” The government, in a response to parliament, said last month that it had collected more than Rs 60 crore as TDS for transactions in VDAs.

“In the absence of certain exchanges contributing to the tax clause, the government will miss out on a potential revenue system generated through these trade channels,” the report said.

The Chase India spokesperson said: “A Self-Regulatory Body (SRO) may be considered to fill regulatory gaps. This would encourage compliance, protect customer interests and promote ethical and professional standards among exchanges.” The Indus Law spokesperson said: “Strict TDS provisions lead to the use of non-tax compliant exchanges to avoid tax. Such discreet transactions can themselves be fertile ground for financial crimes and other criminal activities.”