As a seasoned analyst with years of experience observing global financial markets, I can’t help but feel a sense of deja vu when reading about India’s current predicament with its cryptocurrency tax policies. It seems history has a tendency to repeat itself, particularly when it comes to government responses to emerging technologies.
According to a recent study, it is estimated that India might forego approximately 2 billion US dollars in tax income over the next five years because of its current tax policies causing crypto traders to use foreign trading platforms instead.
According to a December report by the Indian technology think tank Esya Centre, it’s been estimated that the government has failed to collect approximately $724 million in tax revenue from virtual digital assets since July 2022 due to traders shifting their activities to offshore platforms in order to dodge compliance requirements and high taxes.
Following the reversal of a 2018 ban that was essentially a shadow, India implemented a 30% capital gains tax on cryptocurrency transactions, preventing users from deducting losses when calculating gains. Additionally, this tax is applied to domestic cryptocurrency trades, with a 1% Tax Deducted at Source (TDS) being withheld at the time of transaction.
Furthermore, efforts have been made by the government to control the industry by incorporating Virtual Digital Asset Service Providers (VDAs) under the Prevention of Money Laundering Act (PMLA), and prohibiting the URLs of recalcitrant offshore trading platforms to minimize tax evasion and enhance supervision.
As a crypto investor, I’ve noticed that despite the implemented measures, they seem to have little impact on the market. Traders appear to circumvent restrictions through the use of Virtual Private Networks (VPNs), while offshore platforms continue to hold significant sway over trading volumes.
Significantly, from July 2022 to November 2023, Indian users transacted approximately 1.03 trillion Indian Rupees ($12.3 billion) in Virtual Digital Assets (VDAs) on foreign platforms, which include blocked exchanges. The total uncollected Tax Deducted at Source (TDS) during this period is estimated to surpass 34,930 million Indian Rupees (approximately $417 million).
From December 2023 to October 2024, trading volumes on foreign trading platforms significantly increased, reaching approximately INR 2.63 trillion (or around $31.1 billion). This increase is estimated to amount to INR 2,634 crore (about $311 million) in Tax Deducted at Source (TDS), which remains uncollected on these platforms. Since July 2022, the total amount of uncollected TDS has surpassed INR 6,000 crore, according to the report.
Although there were some initial improvements in local transactions during early 2024, it seems that more residents have been moving towards overseas platforms over time. Data from web traffic suggests a decrease of 34% in user engagement on prominent domestic platforms since the beginning of the year.
As of March 2024, KUcoin is the sole Financial Intelligence Unit-registered foreign exchange that has started withholding Tax Deducted at Source (TDS). This is done through a local entity. Yet, its impact on the total offshore trading volumes by Indian users remains relatively small, amounting to less than 5%.
According to the report’s prediction, if the current rate continues, it’s possible that the total amount of unpaid Tax Deducted at Source from offshore crypto trading could exceed ₹17,700 crore (equivalent to around $2.1 billion) within the next five years.
India must revise tax policy
According to the report, the existing regulatory structure tends to impact law-abiding users and organizations unfairly, as it fails to address the fundamental issues leading to non-compliance. Notably, registering with the Financial Intelligence Unit does not require offshore exchanges to establish local subsidiaries or ensure tax compliance.
To tackle these issues, the report proposed modifying Section 194S of the Income Tax Act so that offshore platforms become accountable for tax deducted at source (TDS) deductions, regardless of their physical location within India. Additionally, it suggested lowering the TDS rate from 1% to just 0.01%.
Various parties involved in the industry consistently advocate for a reduction in TDS rates and the option to offset losses. They suggest that such adjustments could reinvigorate local trading activities. However, regulators have yet to provide substantial responses on this matter. Instead, there seems to be an increased emphasis on establishing a national digital currency operated by the central bank, which appears to be capturing most of the nation’s attention currently.
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2024-12-24 13:31