The impact of India's 1% TDS on Virtual Digital Assets: A call for reform
tax policy by imposing a 1% Tax Deducted at Source (TDS) on the transfer of Virtual Digital Assets (VDAs), alongside a flat 30% tax on income from these transactions. The Budget also did not allow for set off and carry forward of losses. The taxation framework aimed to monitor VDA transactions, discourage speculative trading, and ensure steady tax revenue. However, recent analyses indicate that these objectives have not been met, prompting calls for urgent reform.
Unintended Consequences of the 1% TDS
The introduction of the 1% TDS has led to a substantial decline in trading volumes and active users on Indian VDA exchanges. According to a report titled “TDS on Virtual Digital Assets: A report on the effect of the 1% TDS on tax revenue and user trends” by the Centre for Tax Laws at NALSAR University of Law and Meyappan Nagappan, Partner- Trilegal, the total volume of VDAs traded on Indian exchanges fell by approximately 97% within two years during the period between 1st February 2022 and 31st January 2024. Active users on these platforms dropped by about 81% during the same period.
One of the primary reasons for this decline is the migration of traders to offshore exchanges. This shift not only undermines the original intent of tracking VDA transactions but also results in significant revenue loss for the Indian government.
