1% Tax Deductible At Source May Lead To Liquidity Crunch, Say Crypto Experts

ndtv.com:

Crypto-exchange analysts warn that the TDS will suck liquidity out of the market.

When India's government unveiled a plan to tax crypto assets in February, it was the 30% rate on income from digital-asset investments that grabbed headlines. But it's a different levy that has the industry warning of a potentially destabilizing liquidity crunch. 

Along with the capital gains charge, the finance ministry announced a 1% tax deductible at source, or TDS, on all digital-asset transfers above a certain size, starting July 1. No other country imposes such a tax on crypto, according to Anoush Bhasin, founder of crypto asset tax advisory firm Quagmire Consulting. 

Crypto-exchange executives, lawyers and tax analysts warn that the TDS will suck liquidity out of the market by forcing high-frequency traders to dramatically curtail their trading. Combined with the government's decision not to permit offsetting of trading losses in digital assets, it threatens to accelerate an exodus of crypto companies and workers from India, they say.

Nischal Shetty, chief executive officer of WazirX, India's biggest crypto exchange, called the TDS “the worst-case scenario for the industry.”

“There will be no liquidity left in the markets,” said Manhar Garegrat, executive director of policy at crypto exchange CoinDCX. “Trades placed by buyers will not get executed as efficiently as they do today, and such inefficiency will eventually dwindle the whole ecosystem.” 

Bleeding Talent

The tax package and the ban on offsetting losses — which only applies to crypto — represents the latest salvo by a government that still hasn't clearly stated that it will allow cryptocurrencies. India, with an estimated 15 million active crypto users, has been stuck in regulatory