Tax is an important revenue stream for the government that is integral to the functioning of the economy. The purpose of taxation is for the government to obtain funds so that it can spend on providing the required infrastructure, public services, and welfare projects for the development of the country.
The government of India has been revolutionary in its reforms and has supported many emerging industries by providing tax concessions and favorable policies. With over 61,000 startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), India has emerged to be the third-largest startup ecosystem in the world.
Some of the well-thought-through tax provisions have been highly beneficial for the country that has resulted in efficient tax collection, the unearthing of black money, and the development of rural areas and emerging industries. Such favourable policies and tax benefits have led to income generation, employment growth, and a higher provision of goods and services, directly contributing to India’s GDP.
Certain tax reforms have been beneficial to the economy
Securities Transaction Tax (STT) which is the tax levied on securities trading has been a great success story in India that has been generating Rs. 22,000 crore of revenue every year. This is a recurring revenue stream for the government, at a very low cost of collection and at the same time has been beneficial for the equity markets. Similarly, the Tax amnesty proposal by Arun Jaitley introduced a tax amnesty scheme “IDS 2016”, which resulted in the disclosure of over Rs. 65,000 crore in black money, directly increasing the tax inflow of Rs. 29,362 crore in the government’s kitty.
Many fiscal benefits in remote areas such as excise benefits for any company setting up a manufacturing base in Northeast and Himachal Pradesh have resulted in several companies setting up large factories in such remote places and generating employment opportunities for the local people. Similarly, the Production Linked Incentive (PLI) scheme launched by the government has been very successful for the manufacturing sector in India.
Some not-so-thought-through tax reforms that have not worked
There are examples where not-so-favourable tax provisions towards certain industries in India have been detrimental to its growth and India has lost an opportunity to be at the forefront of these industries while losing a potential source of income. Angel tax is an example of a tax that the government wanted to levy on the unrealised increased valuation of startups but due to the backlash faced for the unfavorable provisions, the government had to take the provisions back. If India had decided to go ahead with Angel Tax, it certainly wouldn’t be the home to so many unicorns as it is today.
Similarly, in the case of the retrospective capital gains in the case of the Vodafone Hutch deal, the government decided to tax, retrospectively, a transaction in which ownership in Indian assets was traded overseas. This resulted in a credibility crisis for India in the global markets and the government eventually had to take the provisions back.
TDS on crypto and its implication on the industry
The recent provision of TDS on crypto trade (Sec 194) is a current example of a tax provision that could be highly detrimental to the crypto industry. The tax provision will not only discourage the entrepreneurs and investors from developing the burgeoning industry, but the government too will be at a loss as they will lose out on an opportunity to earn massive tax revenue due to reduced transaction volume in the space.
The Finance Bill 2022 has introduced a 1 percent TDS on the transfer (read sale) of Virtual Digital Assets (VDA) under section 194S. The rationale behind this TDS deduction like any other TDS provision would be two-fold: one is to obtain information about the trades so that the government can collect the optimum tax and the second is a recurring revenue source before people pay their taxes at the end of every quarter or the year. However, what the government does not realize is that the TDS will suck out the liquidity from the market.
In the crypto market, people rotate the capital more frequently i.e., total turnover/ capital employed is a high number. Historically it has been observed that approximately 95 percent of the users trade at least 10 times and about 88 percent of the user’s trade at least 20 times in a month. The current TDS provision (194S) is demotivating for both users as well as the government as the trading volume in the market will be affected. Even at 1 percent, the TDS incidence will be at least 10 times in a month (120 times in a year) for about 95 percent of the users and at-least 20 times in a month (240 times in a year) for about 88 percent of the users.
The TDS provision will require the need for increased working capital and will also increase unnecessary tax filings for a user which is quite burdensome. Moreover, the 1 percent TDS on every trade will result in the government losing out on tax revenue as lower money will be invested/ traded in the markets resulting in lower tax profits. And the fact that the government does not permit offsetting trading losses in digital assets, the industry is witnessing many entrepreneurs and workers leaving the country, further hampering the growth of a growing industry worldwide that has the potential to contribute significantly to India’s fintech sector.
Recommendations to support the industry
For the industry to grow it is very important that there is enough capital to trade in the market. In this light, our recommendation to the government is as follows:
- Government should avoid any tax rules which sucks the capital out during the year from
the industry so TDS should be zero or 0.01 percent at max. - Information capturing can be done by using an annual information return (AIR)
mechanism. In any case, the government is collecting this information through various
investigating agencies. - Introduce a crypto-specific tax “Crypto transaction tax” which is similar to Securities
Transaction Tax. - Clear differentiation between crypto tokens, NFTs, and other crypto assets as the same
tax cannot be applicable for all VDAs.
The author is the CEO & Co-Founder at CoinDCX.
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