Is India’s stance on crypto taxation causing the nation to forego a potential $420 million in revenue? That’s the question posed by a recent study by the Esya Centre, a Delhi-based think tank. The study suggests that the government’s controversial 1% tax deducted at the source (TDS) on crypto transactions is pushing traders to move their operations offshore, resulting in a significant loss of potential tax revenue.
Examining the Impact of the 1% TDS
The study, titled “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market”, estimates that since the introduction of the 1% TDS in July 2022, approximately five million crypto traders have shifted their transactions to offshore platforms. This move has led to an estimated potential revenue loss of $420 million for the Indian government.
Contrary to the government’s intention to tax profitable transactions, the 1% TDS seems to have had the opposite effect, resulting in a significant shortfall in revenue. The study further reveals that Indians redirected over $3.8 billion in trading volume from local to international crypto exchanges after the TDS was introduced.
The Surge in Offshore Crypto Trading
Post-July 2022, offshore platforms saw a significant increase in web traffic, active users, and downloads from Indian traders, along with a corresponding decline in Indian virtual digital asset (VDA) exchanges. Within a month of the implementation of the TDS, a single offshore platform reported over 450,000 new user registrations from India.
Interestingly, the study found that only 0.2% of trading (by value) on offshore VDA exchanges, where TDS should be deducted, is indeed TDS compliant. This suggests a strong preference among users for relief from the 1% TDS.
Proposed Adjustments to the Crypto Tax Framework
In light of these findings, the Esya Centre recommends reducing the TDS on crypto transactions from 1% to 0.01%. This adjustment could align with the government’s objectives of increasing revenue and enhancing transparency in the crypto market.
The think tank also suggests providing clarity on the scope of TDS on offshore platforms and introducing an official registration process with the Financial Intelligence Unit–India (FIU-IND) to differentiate between ‘Onshore’ and ‘Offshore’ platforms. This could empower a government entity to blacklist and obstruct non-compliant offshore Virtual Asset Service Providers (VASPs) and specific VDAs.
These recommendations come at a time when many in the Indian crypto space are calling for a reduction in the tax burden on crypto transactions. Amidst a downturn in the crypto market, Indian exchanges are resorting to cost-cutting measures, seeking alternative revenue streams, and awaiting additional funding.
As discussions continue on a much-needed regulatory framework for crypto in India, the issue of taxation remains a critical and contentious topic. Navigating the complex world of crypto taxation can be challenging, but resources like cryptoview.io offer valuable tools to help traders stay informed and compliant.
