Rs.6000 Crore Tax Lost: Indian Traders move towards Foreign Platforms due to Strict Crypto Tax Policies in India

India’s attempt to regulate the virtual digital assets (VDA) market, such as cryptocurrencies, has resulted in unintended consequences. A report by Delhi-based think tank Esya Centre reveals that strict tax policies and platform bans have pushed Indian crypto traders to foreign platforms, leading to significant tax revenue losses for the country

Key Insights from the Report

1. Increase in Traffic to Blocked Crypto Platforms
   Despite the government blocking nine major offshore crypto exchanges, web traffic to these platforms increased by 57% from January 2024 to October 2024. Indian users are bypassing restrictions using tools like VPNs, mirror platforms, or switching to non-compliant exchanges.
2. Massive Trading on Offshore Platforms
   Between December 2023 and October 2024, Indians traded an astonishing ₹2.63 lakh crore on foreign crypto platforms, including blocked ones.
   • According to the government’s Tax Deducted at Source (TDS) rules for VDAs, these trades should have generated ₹2,634 crore in TDS. However, since foreign exchanges aren’t complying with Indian tax laws, this amount remains unpaid.
   • Since the TDS rule was introduced in July 2022, India has lost over ₹6,000 crore in uncollected taxes from offshore trading platforms.
3. Domestic Exchanges Losing Users
   Indian crypto platforms like CoinDCX, WazirX, and others saw their web traffic drop by 34% in 2024.
   • In contrast, foreign platforms witnessed a 77% surge in Indian user activity during the same period.

Future Trends and Projections

If current trends persist, the report estimates that Indian traders could transact ₹17.7 lakh crore on offshore platforms over the next five years.

• This could result in a loss of ₹17,700 crore in uncollected TDS for the government.

Reasons Behind Offshore Migration

The strict tax policies are a key reason for traders moving to foreign platforms. For example:

• The TDS rate on crypto transactions in India is 1%, significantly higher than other investment avenues like stocks and commodities.
• Indian exchanges face stricter compliance requirements, making them less attractive compared to offshore platforms.

Recommendations from the Esya Centre

The report proposes several policy changes to address these issues:

1. Reduce the TDS Rate
   • Lowering the TDS rate from 1% to 0.01% could encourage traders to return to Indian platforms.
   • This shift could generate between ₹9,169 crore and ₹18,338 crore in tax revenue over the next five years.
2. Enforce Compliance for Offshore Platforms
   • Amend tax laws to ensure that even foreign platforms are responsible for deducting TDS on transactions involving Indian users, regardless of their physical presence in India.
3. Allow Loss Offsetting
   • Traders should be allowed to offset losses against gains in crypto trades, similar to other investments.
4. Create a Registration System
   • Introduce a registration regime for crypto exchanges and mandate consumer protection measures to build trust in the domestic market.
5. Simplify Tax Processes
   • Implement a mechanism to report VDA transactions without imposing high transaction costs on users.

Challenges to Implementation

While these recommendations could improve the situation, implementing them may face resistance:

• Crypto’s decentralized nature: Cryptocurrencies are designed to avoid centralized regulation, making enforcement difficult.
• User trust issues: Indian traders may continue to prefer offshore platforms unless domestic platforms become more competitive and user-friendly.

Why This Matters

India introduced these rules to regulate a rapidly growing market and ensure compliance. However, the strict policies have unintentionally pushed traders toward foreign platforms, leading to significant tax revenue losses.

By revising tax rates and enforcing compliance for offshore platforms, India can encourage traders to return to domestic platforms. This would not only increase tax revenue but also strengthen India’s position in the global VDA market.