The Finance Bill 2022, which comes into effect on April 1, also requires traders to pay a flat 30% tax on gains made on VDAs. Further, unlike in other asset classes, retail investors will not be able to set off losses incurred against crypto coins, claim expenses or acquisition costs, or benefit from a reduced slab for long-term capital gains under the new tax regime.
Once the new norms are fully in force, it will likely “impact volumes by at least 20-50%,” said a crypto industry player on the condition of anonymity.
Last year, sustained investor interest had led to a meteoric rise in volumes on crypto exchanges. According to industry estimates, the top five to six Indian crypto platforms clocked $70-100 billion in trading volume in calendar year 2021, with WazirX alone handling about $43 billion.
However, such growth is likely to taper off this fiscal if tax provisions are not altered, industry executives said.
“Trading volumes are expected to dip significantly after the new tax provisions come into effect. The full impact (will be) felt in the next year, when even common people who have bought cryptos will feel (it),” said Meyya Nagappan, leader of international tax at Nishith Desai Associates.
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Crypto entrepreneurs are of the view that if the tax laws do not allow expenses to be deducted, it will discourage organised trading, leading to reduction of liquidity in the market, and stunting the growth of India’s VDA ecosystem.
“The lack of an opportunity to offset losses from one VDA to profits from another is an extremely harsh step and will drive more and more users out of the exchange ecosystem,” said Neeraj Khandelwal, cofounder of CoinDCX. “Traders are squaring off their positions before March 31 so filing becomes easier.”
The new laws could also trigger a change in the trading behaviour of the estimated 15-20 million retail crypto investors in India, the bulk of whom are under 28-years-old.
Betting on new coins may decrease and traders may stick to investing in the top 10 coins as they are relatively more stable. In addition, it could also lead to investors moving to decentralised exchanges and international exchanges.
Twenty-year old business student Mrityunjaya Lala said the 30% tax, which is “quite steep” can dissuade young investors. “I could get crypto-like returns by trading in futures and options and not have to pay 30% as tax. As young traders we all tend to make mistakes as we are all learning. Now that we can’t exactly set off our losses with other currencies, it creates a big drawback,” he said.
Rippling out
Exchange executives warn that an even greater impact on crypto trading volumes will become visible when the 1% tax deducted at source (TDS) is levied from July. The industry — through the Blockchain and Crypto Assets Council, a part of the Internet and Mobile Association of India, and startup industry body Indiatech — has been lobbying with the government to reduce TDS to 0.01%, ET reported on March 15.
Apart from a drastic dip in volumes, trading will become more expensive as liquidity providers on exchanges will likely pass on the 1% TDS to traders, according to multiple industry executives.
“Market maker (liquidity providers) will add the 1% TDS to the price so it is borne by the user. Buying crypto is going to get slightly expensive in India,” said one of the executives quoted above.
Sathvik Vishwanath, founder of crypto exchange Unocoin, said, “Traders will become cautious about buying and selling, because if they are in loss, they may not sell at all. The rules of the game have changed a little bit and they have to plan accordingly.”
Despite large-scale lobbying by crypto firms, influencers and evangelists to reduce TDS and tax slabs for traders, the finance minister on March 25 approved the Finance Bill that included these tax norms.
“The industry has also not yet received clarifications it had sought on the implementation of tax proposals, and this ambiguity may result in operational obstacles. It is the need of the hour that the government issue these clarifications before TDS comes into effect on July 1,” said Ashish Singhal, cofounder and chief executive of CoinSwitch Kuber, in a prepared statement.
