India’s crypto taxes may reportedly spell bad news for DeFi firms

• DeFi transactions could be subject to a 5% equalisation levy soon.
• The government is also looking to levy an additional TDS from DeFi transactions.
• However, the taxes will not apply to digital assets like rewards from fintech platforms and more.

India’s upcoming crypto regulations may include good news for web2 platforms and more bad news for those running web3 businesses. According to two reports from Economic Times, the definition of virtual digital assets (VDAs) will exclude digital reward programmes run by gaming and other platforms, cashback on cards and wallets, and more. At the same time, the government may introduce a new tax for decentralized finance (DeFi) platforms.

To be sure, India started imposing a 30% tax on VDA transactions from April 1. It also imposes a 1% tax deduction at source (TDS) on sellers of cryptocurrencies. However, the government had a wide definition of VDAs when the taxes were first announced, during the Union Budget in February.

Excluding some digital assets

According to the first report, the country will exclude e-vouchers, points earned on cards for shopping and payments, and other such digital assets. The report quoted officials from the Central Board of Direct Taxes who said that while the definition of VDAs will be clarified later, the taxes are meant to be levied on income generated “through cryptographic means”.

This should be a point of relief for gaming platforms and fintech firms, which were worried about VDA taxes being applied to their reward programmes. Such programmes are often used by such platforms as a means of acquiring new customers.

DeFi tax

While that’s good news for gaming and fintech platforms that mostly operate on web2 business models, DeFi platforms may be in trouble. The second report by ET said that the tax department is looking to “slap additional TDS and equalisation levy” on crypto transactions and income generated by Indians from platforms based outside of India.

Such platforms often consist of DeFi firms, but would also include companies like Biconomy, Stader Labs, and more, which provide services to firms overseas.

“The government is looking to levy 20% TDS on these transactions, especially when one of the persons who has entered the contract has not submitted their PAN card details,” the report said, citing a person aware of developments.

Equalisation levy is a tax India levies on platforms based outside the country, that generate income by doing business within its borders. The same tax is also levied on firms like Google, Amazon, Facebook, and more, and has been opposed by such firms as well.

The report claimed that a 5% equalisation levy may be imposed on transactions on DeFi platforms.

The tax on DeFi platforms could further affect the crypto industry, which has taken a slight downturn in the past month. Crypto research platform Crebaco reported on April 1 that trading volumes on top exchanges like WazirX, CoinDCX, and Zebpay had fallen by over 50% after the taxes on crypto income mentioned above came into effect.

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