Tds On Virtual Digital Assets: Navigating The Challenges Of Taxation And Investor Migration

Jyotirmoy Alayman & Aryan Nagpure, B.A. LL.B. (Hons.) Gujarat National Law University, Gandhinagar

ABSTRACT

Compared to the rest of the world, India has seen a long run of crypto development in quite a short time. With the surge of crypto investors and traders, along with the emergence of Indian crypto exchanges, a recognition of crypto was indeed expected by the Indian crypto community. However, this recognition did come along with a burden. Pursuant to the Finance Act 2022, the Indian government introduced a 1% Tax Deducted at Source (TDS) on Virtual Digital Asset (VDA) transactions through Section 194S of the Income Tax Act, 1961, which led to unintended consequences.

TDS is a mechanism under the Income Tax Act, 1961, primarily designed to curb tax evasion. By mandating the deduction of tax at the point of income generation, TDS ensures that a portion of the tax liability is paid upfront, making it difficult for individuals and entities to evade taxes by concealing income through unregulated transactions.

While the TDS mechanism is aimed at curbing tax evasion and simplifying tax administration, when it came to VDAs, it was more focused on tracking and keeping a record of transactions. However, this tax compliance caused a staggering 95% drop in trading volume on Indian crypto exchanges and an estimated $420 million loss in potential government revenue due to the migration of Indian crypto traders to overseas platforms. Therefore, it is evident how, just for the purpose of tracking the crypto transactions, the current tax structure has not only impacted Indian VDA exchanges and caused a loss in tax revenue but also dismantled the priority purpose of TDS in VDA, which was to track unregulated VDA transactions since investors have already migrated to overseas exchanges.

This migration highlights the need to reevaluate the TDS regime on VDAs, analysing the impact on Indian exchanges, revenue losses, and the challenges in monitoring transactions on decentralised platforms. It proposes alternative approaches to strike a balance between effective tax collection and fostering a thriving crypto ecosystem within India's regulatory framework. By addressing the shortcomings of the current TDS regime, policymakers can mitigate revenue losses, promote compliance, and create a more conducive environment for the growth of the Indian crypto industry while safeguarding the nation’s tax revenue interests.

Keywords: Virtual Digital Assets (VDAs), Tax Deducted at Source (TDS), Cryptocurrency, Taxation, Revenue Loss, Investor Migration, Overseas Exchanges.