Reports have emerged saying that the Indian tax department is considering imposing an additional 20% tax deducted at source on DeFi, as well as an equalization levy.
India already imposes a 30% tax on crypto gains and an additional 1% tax deducted at source.
Other countries are also looking at exerting control over DeFi, but no effective measures have been implemented yet.
The Indian government is taking further action against the crypto market, this time turning its taxation scheme to the decentralized finance market. Local media outlets reported that the country’s tax department is considering an additional 20% tax deductible at source (TDS) and equalization levy on DeFi transactions. This would be an additional charge on top of the 30% tax on crypto gains.
Sources close to the tax department told the Economic Times that officials have been examining the activity of Indians who have been earning interest on platforms based outside the country. The government is especially looking to add these transactions to those who have not submitted details relating to the tax ID number, also known as a PAN card.
DeFi has been an effective way for hodlers to earn passive income on their assets. They simply deposit their assets and earn interest on the funds, and this has been one of the biggest appeals of DeFi.
The additional 20% tax, if passed, will likely stifle Indian cryptocurrency activity even more. The country’s crypto trading volumes dropped significantly since the new tax law came into effect. The founders of WazirX have also moved to Dubai to avoid the effects of the taxation.
However, it’s unclear how the government will effectively track these accounts. After all, the decentralized nature of DeFi makes the matter very difficult. They may instead look to what few middlemen there exist in the market to exert some control — like the EU’s focus on unhosted wallets.
India, Not the Only Country Scrutinizing DeFi
DeFi has become a hot talking point in the space, as governments look to rein in development such as stablecoins, interest-bearing platforms, and the tokenization of securities. India is far from the only country focused on this, though it seems the quickest on the uptake.
The EU took aim at unhosted wallets, banning crypto transactions that were not accompanied by identifying information. Unhosted wallets include MetaMask, Ledger, and Trezor. The vote was roundly criticized by crypto companies, for reasons relating to both innovation and privacy.
That is one way that authorities are trying to clamp down on the crypto market, but it remains to be seen how this could be employed effectively at scale. The very nature of the blockchain makes it very easy for wallets to be created, and tracking them all seems unrealistic. Establishing identification measures is something that will trouble all governments, and it’s unclear whether it can be successfully implemented.