India government introduce 30% tax and TDS on digital assets
On 1 Feb 2022, India Finance Minister Nirmala Sitharaman, announced a 30% tax on income from any gains of cryptocurrency assets in her 2022 Budget Speech. She also introduced a TDS at 1% on any payment made for the transfer of cryptocurrency assets.
On one hand, the proposal could be seen as a positive step for India government to recognize cryptocurrency assets as legitimate assets, at least from tax perspective. On the other hand, the tax rate which is at a high end will lower the return of cryptocurrency assets investor.
Actually India has been imposing capital gain tax on any sales of capital assets in a rate from 10% to 30% (depending on long term or short term). 30% tax is undoubtedly the highest backet amount all types of incomes. Also there are also two unfavorable and unfair treatments comparing to other income:
1. Any loss from cryptocurrency assets couldn’t be carried forward to offset any cryptocurrency assets gain in future year;
2. Any expenditures (except for acquisition costs of cryptocurrency assets) are not deductible to calculate the tax.
Given cryptocurrency assets has no centralized financial origination to manage, someone may consider if it is viable to set up overseas structure in some jurisdictions such as Hong Kong Singapore which don’t impose any capital gain tax to invest in cryptocurrency assets. Subsequently any dividend income received by India companies and individual may be subject to lower income tax in India. We may also need to consider if there are any CFC Rules as well as GAAR Rules to attack the structure.
In the meanwhile, the proposal also confirms the 1% TDS on any payment made for the transfer of cryptocurrency assets. 1% TDS is at a very low end amount all TDS rates for different types of payments. It is to be seen if this is applied to payment to overseas company as well.
Currently any types of income repatriated by an India company to overseas companies may be subject to 10% - 20% withholding tax subject to tax treaty benefit. For example, if an India company makes a dividend payment to foreign shareholders, the withholding tax rate is 20% based on domestic tax rule. If the 1% TDS is also applied to overseas payments by India companies, we might also need to look whether the cryptocurrency assets payment may be a more tax efficient structure to repatriate the excessive funds out of India.