Cryptocurrency in India is going through a process of legal identification. There is little surety if the country will legalize the digital currency considering that the digital rupee has started circulating in the market. An application of 1% TDS on the transfer of virtual digital assets worth more than ₹10,000/- has come under question by reports and experts.
A report by Chase India & Indus Law has said that the 1% TDS is causing a flight of capital and users, meaning that a large number of users are shifting either to a foreign exchange or an unregulated exchange in India. This is hurting the economy as India is missing out on a chance to collect more tax revenue.
Moreover, customers are suffering since unregulated exchanges are more likely to default by, for instance, halting withdrawal for no reason. Crypto exchanges in India see a fall in liquidity because high-frequency traders are now choosing to lock their funds instead of transferring them often to save money on TDS.
Chase India & Indus Law has also said in its report that the TDS factor, combined with the absence of comprehensive regulations, is increasing the customer base for foreign and gray market crypto exchanges. The objective of imposing TDS is to keep track of the crypto transfer. The same can be done with a lower TDS rate, adds the report.
A nominal TDS rate would not hurt frequent traders and allow the government to keep a trail of the transactions related to virtual digital assets. Higher usage of unregulated exchange platforms could very well be the breeding ground for criminal financing and other criminal activities.
According to the present taxation rule, an individual has to pay a 30% tax on withdrawing the crypto from the exchange along with 1% TDS.
