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India’s Controversial Crypto Tax Sees Users Shun Local Exchanges

The 1% TDS on digital asset transactions has provoked “an exodus of users, funds and trades to offshore platforms,” according to a study by Esya Centre. 

India taxation report ESYA

In 2022, India introduced a 1% tax deducted at source (TDS) alongside a 30% capital gains tax on crypto profits. TDS is deducted when asset transfers involve a change in ownership and applies to all such transactions, including the ones via P2P platforms. The tax aims mainly to record information and track the purchases of crypto assets, thus increasing traceability in India’s crypto ecosystem.

The introduction of the taxes raised concerns that their high level would kill the crypto industry in India. “We have entered a period of pain,” - said Nischal Shetty, the CEO and founder of WazirX, one of India's biggest exchanges, at the time.

The 2023 Global Crypto Adoption Index report from Chainalysis showed that South and South-East Asia were leaders in grassroots crypto adoption with India being an indisputable front-runner.

Indeed, the policy has not been a success. Research conducted by the Esya Center, a Delhi-based think-tank, in January 2023 proved that “the main (unintended) impact of the tax policy (including TDS and 30% tax on crypto profits) on the Indian VDA [virtual digital asset] industry is offshoring of domestic business and liquidity to foreign exchanges.” It also showed that citizens moved more than $3.8 billion in trading volume from local to international platforms.

The follow-up study by the Centre, aimed at estimating the efficacy of the TDS, proved it had not met its goals. The survey showed that the tax had largely made Indian users switch from local platforms to offshore ones. A significant decline was discovered in the use of domestic exchanges compared to the use of those in foreign jurisdictions. The decline accounted for "42% in reach, 45% in activity, and 3.1% in web traffic" right after the announcement of the law, and a corresponding decline in the three parameters ranging from 44% to 74% over the following one-year period. 3.5 trillion rupees ($42 billion) worth of VDAs were traded by Indians on offshore platforms within one year after the date of implementation of the TDS, which is more than 90% of the total VDA trade volume by Indians, according to the report.

The TDS also cost the government in potential revenue: according to government reports, only 2.58 billion INR was collected in this period. This is a loss of about 93% to the exchequer, compared with a scenario in which all P2P trades were compliant with the tax policy, said the report. 

"Data shows that two likely policy objectives of the tax – to curb speculation and create transparency around transactions – have not been achieved,” - said Dr Vikash Gautam, the report's author, to the Economic Times. 

The researchers recommend that the government should clarify TDS's applicability to offshore platforms and lower the tax to 0.01%. Another option to fulfil the purpose of data collection is to implement an alternative reporting mechanism. The research also suggests allowing a government authority to blacklist and block offshore VASPs and non-compliant platforms to reach its goals.