القائمة الرئيسية

الصفحات

A crisis in the cryptocurrency market in India due to the imposition of a 1% tax on the sector


 When the government of India unveiled a plan to tax crypto assets in February, at a rate of 30% on income from digital asset investments, it caught the attention of followers. But that tax was different, as it made the cryptocurrency industry warn of the potential for a destabilizing liquidity crisis.

In addition to the capital gains tax, the Ministry of Finance announced a 1% withholding tax onall transfers of digital assets over a certain size, starting in early July.

No other country imposes such a tax on cryptocurrencies, according to Anush Bassin, founder of crypto asset tax consultancy Quagmire Consulting.

Crypto-exchange executives, lawyers and tax analysts say the withholding tax will suck liquidity from the market by forcing heavy dealers to scale back significantly.


Combined with the government's decision not to allow losses from trading in digital assets to be compensated, it threatens to accelerate the exodus of crypto companies, and their employees en masse, from India, they say.

Read also: Thailand bans the use of cryptocurrencies as a means of payment


Nishal Shetty, CEO of WazirX, India's largest crypto exchange, described the withholding tax as a "worst-case scenario for the industry".


“There will be no liquidity left in the markets,” said Manhar Gargrat, executive director of policy at cryptocurrency exchange CoinDCX. “The trades made by buyers will not be executed as efficiently as they are today, and this inefficiency will eventually lead to to diminish the entire system.


talent bleeding

The tax package and the ban on compensation for losses - which only applies to cryptocurrencies - is the latest attempt by a government that has not yet clearly stated that it will allow cryptocurrency to be traded.


India has about 15 million active cryptocurrency users, which have faced regulatory hurdles since the Supreme Court in 2020 overturned a central bank directive banning regulated entities from working with digital asset firms.

According to Sandeep Nilwal, co-founder of Indian blockchain startup Polygon, thousands of developers, investors, and entrepreneurs are heading towards more favorable destinations for cryptocurrency during April, as a result of the uncertainty.


When the government first revealed taxes on cryptocurrencies, the announcement was met with relief that it was interpreted as a sign that there would not be a total ban on cryptocurrency trading, but the situation changed after the crypto industry absorbed the details of the withholding tax.


Read also: China vows to continue crackdown on cryptocurrency speculation

Under the new system, buyers of crypto assets must deduct 1% of the withholding tax, on behalf of the seller, if the transaction value exceeds 10,000 rupees (about $132). According to Basin, small trades will also be taxed if they exceed Rs 50,000 cumulative in a financial year.


Investors are entitled to a refund if, during a fiscal year, the total amount allocated to tax withheld at source exceeds their total tax liability for that period.


strangling capital

Bassin clarified that when transactions are conducted on a central stock exchange, it is the stock exchange's responsibility to deduct the tax withheld from the source, on trading.

While transacting on a decentralized trading platform, where buyers and sellers interact without an intermediary, people usually trade anonymously, which makes collecting withholding tax complicated.


While the capital gains tax reduces the attractiveness of cryptocurrencies to investors, the withholding tax poses a threat to the very fundamentals of the market, say critics. India does not impose withholding tax on stock trading.

A heavily traded trader could see 60% of his capital set aside for withholding tax payments after just 100 transactions, estimates Gargrat, who is also a member of the Board of Blockchain and Crypto Assets in India.


"The way the tax has been set is going to drive people out of the country," says Dinesh Kanabar, CEO of Dhruva Advisors, a tax and regulatory advisory firm.

India's Finance Minister Nirmala Sitharaman spoke before the lower house of Parliament on March 25, and said that the withholding tax would allow the government to track transactions and not represent an additional tax, but executives and experts reject the matter, and see that it is possible to achieve the same goal by imposing a tax at a much lower rate, without confusing trading.

Read also: Brazil takes an initial step towards regulating cryptocurrency

As with decentralized exchanges, the withholding tax would be nearly impossible when it comes to offshore trading platforms, said Gargrat, who added that the tax would essentially drive trading outside of the local exchanges that the Indian government follows most closely. of clarity.

The system becomes more difficult for traders in cryptocurrency pairs, such as Bitcoin/Ethereum, according to Basin, founder of crypto asset tax advisory. Each transaction involves two separate transactions, for example, buying bitcoins from the counterparty, and then selling. “At one point, you will be exposed to a loss of 1% because you are selling bitcoin and at the next step you will be subject to a 1% withholding tax, because you are buying Ethereum from another seller … the accounting process would be crazy in that case.”


Comments