Crypto Taxation Misses the Mark: India Loses $420 Million in Potential Revenue Due to 1% TDS

The Indian government has lost $420 million in what could have been a substantial revenue stream as a result of its taxation, forcing traders to move their transactions outside the country.

Experts are now suggesting that the Indian government should take a more relaxed approach to its controversial stance on crypto taxation.

According to a recent study by Delhi-based think tank Esya Centre, the highly debated crypto policy in India, involving a 1% transaction tax deducted at the source (TDS), should be reduced to 0.01%. This adjustment is recommended to align with the government’s objectives of increasing revenue and enhancing transparency.

Taxing Times for Indian Crypto Traders

The TDS – which is considered a form of income tax – has led to approximately five million crypto traders shifting their transactions offshore. The study estimates that since its introduction in July 2022, this tax has resulted in a potential revenue loss of $420 million for the government.

Contrary to its intended purpose of taxing profitable transactions, the findings in the “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market” indicate a significant shortfall in achieving this goal.

This study builds on the Esya Centre’s previous report, revealing that Indians redirected over $3.8 billion in trading volume from local to international crypto exchanges following the announcement of the controversial rules.

After the implementation of TDS, millions of Indian users transitioned to offshore platforms, and within a month, a single offshore platform noted over 450,000 new user registrations. Subsequently, the think tank observed a surge in web traffic, active users, and downloads from Indians on offshore platforms post-July 2022, accompanied by a decline in Indian VDA exchanges during the same period.

An in-depth analysis of average weekly user figures, downloads, and web traffic further validated the thesis. Notably, the TDS provision, initiated on July 1, 2022, and the absence of any government relief from this tax framework as of February 1, 2023, had the most significant impact on investors, thereby highlighting users’ strong inclination for relief from the 1% TDS.

“Based on INR P2P data collected from leading offshore exchanges, we estimate that over INR 3,50,000 crore was traded by Indians on offshore platforms since the 1% TDS was introduced in July 2023 – the figure amounts to over 90% of total VDAs traded by Indians.”

This essentially means that only 0.2% of trading (by value) on offshore VDA exchanges, on which TDS should be deducted, is indeed TDS compliant. Esya, however, confirmed that its estimate does not include private transactions or larger over-the-counter (OTC) trades.

In addition to lowering the TDS to 0.01%, the organization also recommended that India should provide clarity regarding the scope of TDS on offshore platforms. The act of registering with the Financial Intelligence Unit–India (FIU-IND) could serve as an ‘official’ makeshift license to distinguish between ‘Onshore’ and ‘Offshore’ platforms.

Additionally, the recommendation includes empowering a government entity to blacklist and obstruct offshore Virtual Asset Service Providers (VASPs) and specific VDAs associated with non-compliant platforms.

Calls Escalate to Ease Crypto Tax Rules

It is important to note that the recommendation aligns with the increasing chorus from various players in the crypto space within the country, urging a reduction in the tax burden on crypto transactions.

Amidst the crypto drawdown, Indian crypto exchanges resorted to trimming expenses, renegotiating partnerships, postponing employee salary increases, implementing layoffs, exploring alternative revenue streams, and undergoing rebranding initiatives. These measures aim to prolong their financial viability until they secure additional funding.

While the current resurgence in the crypto market is increasing trading volumes in other regions, domestic trading platforms find themselves in a state of uncertainty. India has confirmed active discussions on a much-needed regulatory framework, and the taxation talk appears to be a deferred topic.