Indian Government Misses on $420 Million in Crypto Taxes as 90% Trade Volume Shifts Offshore: Report

The imposition of a one percent tax-deducted-at-source (TDS) on the trading of cryptocurrencies in India has led to a massive shift of millions of users to offshore crypto exchanges, according to a recent report published by the Esya Centre.

In February 2022, India’s Ministry of Finance introduced a one percent TDS on crypto transactions with the aim of reducing speculative activity and increasing transparency within the crypto ecosystem.

With many crypto users migrating to offshore exchanges, Indian government has not achieved what it set out to with its 1% TDS on crypto transactions.

Indian Government Misses Out on $420 Million in Taxes

The Esya Centre’s report has revealed that implementation of 1% tax resulted in the loss of potential revenues of approximately $420 million (Rs. 3,493 crores) compared to the collected revenue of just $30 million (Rs. 258 crores).

India’s digital economy missed out on opportunities worth four to five times this value due to foregone positive externalities.

Domestic Indian crytp exchanges accounted for 97% of the collected revenue, contributing approximately $29 million (Rs. 250 crore), while trades by Indians on offshore platforms contributed only $840,000 (Rs. 7 crore), which is just 0.2% of the $420 million (Rs. 3,500 crores) that should have been collected.

The Esya Centre report drew data from both Indian and global crypto ecosystems, analyzed transaction volumes from 13,000 peer-to-peer (P2P) traders, and surveyed executives working at India’s leading crypto exchanges to assess the impact of the one percent TDS levy.

So far in this financial year, Indian government has only collected $12 million from 1% TDS on crypto transactions.

Three to Five Million Indian Users Shifted to Offshore Platforms

The report reveals that between February 2022 and July 2022, three to five million Indian users shifted to offshore platforms, with a single offshore exchange reporting a staggering 450,000 sign-ups in the month following the TDS implementation in July 2022.

Web traffic, active users, and downloads by Indians on offshore platforms have also been steadily rising since July 2022, while Indian crypto exchanges experienced a concurrent decline.

The report further revealed that a causal analysis of data on weekly active users, downloads, and web traffic suggests that the TDS provision and the lack of government relief from this tax regime have severely impacted users. The impact ranged from 44% to 74% on these parameters.

P2P trader data from leading offshore exchanges indicates that over $47 billion (Rs 3,50,000 crores) worth of cryptocurrencies were traded by Indians on offshore platforms between July 2022 and July 2023, accounting for more than 90 percent of the total crypto trade volume.

India was ranked at the top by Chainlaysis in terms of crypto adoption earlier this year.

1% TDS Blamed for Massive Shift to Offshore P2P Trading

A survey of executives at seven leading Indian crypto exchanges found that the TDS is the primary reason for the surge in offshore P2P trading, highlighting the urgent need for policy revisions.

Reducing the TDS to 0.01% has been suggested as a crucial corrective measure to motivate traders to return to domestic exchanges.

Based on these findings, the Esya Centre study proposes several policy measures for the government:

Clarify the applicability of TDS to offshore platforms.
Lower the TDS to 0.01 percent or implement an alternative reporting mechanism, such as the submission of an Annual Information Report (AIR), to fulfill data collection purposes.
Standardize activities like due diligence for token licensing and listing, as well as reporting and information sharing.
Authorize a competent government authority to blacklist and block offshore exchanges that are outside the tax net.

Dr. Vikash Gautam, the author of the report and an Adjunct Fellow at the Esya Centre, emphasized:

“The VDA tax architecture in India is a lost opportunity in terms of revenues for the exchequer and localization of the VDA industry. There is an urgent need to reduce the TDS to the benefit of the Indian economy and VDA investors/consumers.”