The Indian government lost $420 million, which could have been a substantial source of revenue, due to its taxation, forcing merchants 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 cryptocurrency taxation.
India’s highly controversial crypto policy, involving a 1% transaction tax withheld at source (TDS), should be reduced to 0.01%, according to a recent study by Delhi-based think tank Esya Centre. This adjustment is recommended to align with the government’s objectives of increasing revenue and improving transparency.
Tough times for Indian crypto traders
TDS – which is considered a form of income tax – has led to around five million crypto traders moving their transactions overseas. 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 the intended objective of taxing profitable transactions, the findings of the “Assessment of the impact of tax deducted at source on the Indian virtual digital assets market” indicate a significant gap in achieving this objective .
This study builds on the Esya Center’s previous report, revealing that Indians redirected over $3.8 billion in trading volume from local crypto exchanges to international exchanges after the controversial rules were announced.
After the implementation of TDS, millions of Indian users migrated to offshore platforms, and within a month, a single offshore platform recorded over 450,000 new user registrations. Subsequently, the think tank observed an increase in Indian web traffic, active users and downloads on offshore platforms after July 2022, accompanied by a decline in Indian VDA trading during the same period.
A thorough analysis of average weekly user figures, downloads and web traffic further validated the thesis. In particular, it is the TDS system, initiated on July 1, 2022, and the absence of any government relief from this tax framework as of February 1, 2023, which had the most significant impact on investors, thus highlighting the strong propensity users to a reduction from 1% TDS.
“Based on INR P2P data collected from major offshore exchanges, we estimate that over INR 3,50,000 crores have been traded by Indians on offshore platforms since the introduction of 1% TDS in July 2023 – this figure represents more than 90% of the total ARVs negotiated. by the Indians. »
This essentially means that only 0.2% of transactions (by value) on offshore VDA exchanges, on which TDS is to be deducted, are actually TDS compliant. Esya, however, confirmed that its estimate does not include private transactions or larger over-the-counter (OTC) transactions.
Besides lowering TDS to 0.01%, the organization also recommended that India clarify the scope of TDS on offshore platforms. The act of registration with the Financial Intelligence Unit – India (CRF-IND) could serve as an improvised “official” license to distinguish between “onshore” and “offshore” platforms.
Additionally, the recommendation includes empowering a government entity to blacklist and impede offshore virtual asset service providers (VASPs) and specific VDAs associated with non-compliant platforms.
Calls intensify to relax crypto tax rules
Importantly, the recommendation aligns with the growing chorus of various players in the crypto space in the country, calling for a reduction in the tax burden on crypto transactions.
Amid crypto withdrawal, Indian crypto exchanges have resorted to cutting expenses, renegotiating partnerships, postponing employee salary hikes, implementing layoffs, exploring sources alternative revenues and rebranding initiatives. These measures aim to prolong their financial viability until they obtain additional funding.
As the current resurgence of the crypto market increases 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 discussions on taxation appear to be a deferred topic.
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