Crypto Tax Set to Complicate Life for the Exchanges

The government’s decision to tax cryptocurrency transactions by levying tax deducted at source (TDS) is set to trigger another tax complication in the form of an equalization in the form of an equalization levy for crypto exchanges, tax experts said.

This is because in most cases, crypto assets bought by Indian residents through exchanges are from people not based in the country, they said.

Equalization levy is applicable to foreign players and when services are sold by non-Indians.

There are many instances where there is no clarity on whether the seller in a crypto transaction is in India or not because most exchanges have holding entities outside the country, experts said.

Also, in many cases exchanges would be covered under the definition of ‘ecommerce’ players for an equalization levy of 2% to come into play, they said.

“In the event a transaction is conducted through crypto exchanges, they (exchanges) can be entrusted to act as an intermediary for collecting TDS, similar to what they have been doing for STT (Securities Transaction Tax) and stamp duty payment,” said Paras Savla, partner at KPB & Associates.

When exchanges attempt to comply with this, they will have to first deduct TDS and keep it on their books, which would eventually attract equalization levy experts said.

“If exchanges are required to comply with the withholding requirements, they would have to come into the money flow where they would have to collect the total amount (of transaction) first and then pay the seller after the withholding of taxes,” said Rahul Garg, managing partner of tax and regulatory consultants Asire Consulting.

“This may trigger multiple tax-related compliances in the hands of exchanges wherein if the buyer is an Indian resident, he would be subjected to an ecommerce equalization levy as most exchanges are based outside India and are essentially providing internet services,” he said.

When exchanges deduct 1% TDS, it will be recorded as “consideration” on their books, tax experts said. This in turn would attract a 2% equalization levy that is applicable, they said.

Finance minister Nirmala Sitharaman in her Union Budget 2022-23 announcement on last Tuesday had proposed a 30% income tax on returns from digital currencies. This would mean that investors would have to cough up 30% tax on the returns they make from trading or investing in cryptocurrencies. S-ET

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