Cryptocurrency exchanges want clarity on TDS liability if they move operations overseas

Synopsis

The government in this budget introduced a 1% tax deducted at source or TDS on every transaction, along with a 30% tax on returns of investors and traders.

Mumbai: Some cryptocurrency exchanges that have either moved or are looking to move out of India have reached out to their tax advisors to figure out if they are required to still comply with the 1% TDS regulation.

Many tax experts have said that if an exchange sets up an office outside the country, the taxman may find it tough to collect the 1% tax on transactions.

The government in this budget introduced a 1% tax deducted at source or TDS on every transaction, along with a 30% tax on returns of investors and traders.
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Some of the largest cryptocurrency exchanges including CoinDCX, BuyUCoin, Koinex, Zebpay, Coindelta, CoinRecoil, and Coinome have either already moved overseas or are in the process of doing so.

Industry trackers point out that while exchanges can comply with TDS, they must build technology from scratch that could eat into their margins further.

Also, such technology development does not work in their favour as TDS makes market making economically infeasible, say insiders.

“Exchanges don’t find complying with TDS economical as they have to build technology to carry out the calculations millions of times and it eats into their wafer-thin margins,” said Gaurav Mehta, founder of Catax, a cryptocurrency tax consultancy firm.

However, legal experts point out that despite the tax department’s apparent inability to implement the law in the absence of any data, exchanges themselves may find it challenging going ahead.

“Moving exchange outside India may not absolve the exchanges of TDS regulation as in that case DTAA (double tax avoidance agreement) India has with that country will come into effect along with FEMA regulations. Also, like any other foreign exchange transaction where Indians are the consumers or users, special economic presence (SEP) and regulations around business connections could also come into play,” said Ankita Singh, partner at law firm A&P Partners claim that they are working on a system to comply with TDS.

“We are working on the implementation and practicality of the 1% TDS regime,” said Shivam Thakral, CEO, BuyUcoin, a cryptocurrency exchange looking to move overseas.

The tax department can still seek the tax from traders and users. But in the absence of data shared by exchanges on transactions and with millions of transactions to scrutinise, this may be almost impossible.

CoinDCX, Zebpay and UnoCoin didn’t respond to the ET’s request for comment.

“It’s unlikely that exchanges will share data on all the transactions with the tax authorities in India,” said a person advising one of the exchanges.

“Practically, if exchanges decide to not comply with TDS, there is not much that the tax department can do. Also, the tax department may not even know how to go after traders until they adopt technology to fight technology problems,” said Catax’s Mehta.

For the tax department to figure out the 1% TDS, it may need information about all the transactions, which is currently only held by the exchanges.

“There is no clarity presently as to how these regulations can be enforced by the tax department, especially if exchanges are operating from a country where India doesn’t have DTAA. Whether they will be allowed even to continue operations here is under question, which can only be addressed when such situations come into play and are considered by the tax authorities and the judiciary. The crypto regulation universe is evolving. We will see these issues addressed in due course of time,” said Singh of A&P Partners.
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Updated: 05/14/2022 — 14:00

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