SynopsisWhen crypto exchanges deduct 1% TDS, it will be recorded as “consideration” on their books, say tax experts. This in turn would attract a 2% equalisation levy that is applicable on such a consideration.
The government’s decision to tax cryptocurrency transactions by levying tax deducted at source is set to trigger another tax complication in the form of an equalisation 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.
Equalisation 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 cryptocurrency 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 equalisation 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 them on their books, which would eventually attract an equalisation 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 the 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, they would be subjected to an ecommerce equalisation 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% equalisation levy that is applicable on such a consideration, they said.
Finance minister Nirmala Sitharaman in her Union Budget 2022-23 announcement 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. ET had first reported on December 4 that the government was looking to add cryptocurrencies to tax law.
The government also introduced a 1% TDS on digital assets. This, tax experts said, will only be applied to cryptocurrency exchanges when they sell or transfer crypto assets to investors or traders.
The government has expanded the scope of the equalisation levy from last year to include any purchase by an Indian or India-based entity through an overseas platform.
An equalisation levy of 2% is also applicable on all online sales of goods or services, any purchase that has been made online, any online payment, or even an offer that’s been accepted online.
The equalisation levy, however, could just be a temporary pain point.
As a signatory to the Organisation for Economic Cooperation and Development’s (OECD) global tax deal, India is likely to scrap unilateral measures such as equalisation levy, tax experts said.
Many crypto exchanges in the last few years have set up structures where they don’t have a permanent place in India and their India offices only do marketing. Many companies have moved to the Seychelles, the British Virgin Islands (BVI), Mauritius, Singapore, or Dubai in a bid to safeguard themselves from some of the Indian laws in the last few years. A permanent establishment is a concept in tax laws that determines which country has the first right to tax a company and to what extent.
(Originally published on Feb 08, 2022, 04:16 AM IST)
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