India Lost $420M in Tax Revenue Due to Its Harsh Crypto Taxation

India Lost $420M in Tax Revenue Due to Its Harsh Crypto Taxation

Key Takeaways:

  • 1% TDS tax and 30% income tax led Indian crypto users to shift trading to foreign exchanges.
  • Nearly $420 million in revenue and 5 million users were lost to off-shore exchanges.
  • Indian exchanges reported up to 97% decline in trading activity.

Esya Centre, a think tank focused on fintech said in its report that 1% TDS imposed on crypto assets in India led to the outflow of crypto users and loss of revenue for the state.

The taxes are estimated to have forced as many as 5 million Indian crypto users to shift their accounts off-shore with global crypto platforms like Binance.

As a result, Indian crypto exchanges saw their trading volumes plummet overnight by more than 95%.

Indian Crypto Taxation Rules in Brief

From April 2022, Indian crypto users were mandated by law to pay a whooping 30% tax on income made through crypto assets. Further, the tax has only to be calculated on total profits and losses could not be offset against the profits. It is one of the harshest crypto taxes around the world.

If a user has made $100 in profits and $100 in loss for a year, the law would mandate a $30 tax even if their net gains are zero.

Though this move was highly criticized by the community in India, the government did not make any concessions.

Again in July 2022, Indian government mandated that every cash to crypto crypto transaction, and vice-versa, would be charged 1% tax deducted at source (TDS). Though this tax could be re-claimed after filing an income tax return, but the process would take up to a year.

Report Findings by Esya Centre

The report released by Esya Centre studied the impact of 1% TDS on crypto transactions in the country which were introduced in July 2022.

The TDS was found to have discouraged crypto trading activity in the country and resulted in the shifting of users from Indian exchanges to international ones (like Binance) and other untraceable channels.

The TDS prompted as many as 5 million users to shift their trading activity outside the country.

Impact of 1% TDS on Indian Crypto Users
Impact of 1% TDS on Indian Crypto Users

Further, it has caused nearly a half-a billion ($420 million) loss in revenue to the government.

However, the most serious impact of the policy was that Indian crypto exchanges lost all of their business almost overnight.

The above figure shows that nearly 97% of trading volumes were lost. This was because most of the users decided to shift to foreign exchanges which was outside the jurisdiction of Indian authorities.

The report also highlights that the TDS gained from all Indian exchanges were ₹249.29 crores or about $30 million and the TDS collected by Indian Government was a little above at $30.1 million.

If the government would not have imposed such a tax, it would have gained 13.6 times more revenue or $420 million.

The report concluded that following the month of TDS imposition, a single foreign exchange signed up about half a million Indian users.

The web traffic, app downloads, active users of these exchanges increased by multiple times during that period. Only 0.2% of offshore trading volume was compliant to the 1% TDS rule.

More than 90% of all traded crypto assets by Indian users were being done on off-shore exchanges by February 2023.

Esya Centre recommended in its paper that TDS on crypto tax would be reduced to 0.01%. This would help in bringing back some traffic.

The Indian Finance Minister said in a parliament address that the purpose of TDS was to trace transactions. Esya recommends the usage of an Annual Information Report in place of 1% tax on every transaction.

Further, it recommends that the TDS rule to be made clear to the off shore exchanges. Both On-shore and Off-shore exchanges should also register with Indian Financial Intelligence Unit.

The final recommendation suggests that non-compliant off-shore exchanges should be blacklisted.

Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.

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