In 2022, India’s foray into regulating the burgeoning crypto sector introduced a 1% tax deducted at source (TDS) on crypto transactions. This seemingly straightforward tax policy has sparked a complex debate, magnified by recent analysis and commentary from industry figures such as Sumit Gupta of CoinDCX.
CoinDCX, a leading player in India’s crypto market, found itself significantly impacted by the new TDS. Before the tax, CoinDCX was a unicorn with a valuation exceeding $2 billion. However, the TDS has since led to a drastic drop in its trading volumes, reducing revenues to a mere third of their pre-tax levels. This decline has been attributed to the TDS’s effect on the overall Indian crypto trading landscape, pushing 95% of the trading volume to offshore platforms beyond the reach of local authorities. This shift not only undermines the government’s intent to track crypto transactions but also challenges the broader financial ecosystem’s integrity.
The Esya Centre’s 2023 report offers a comprehensive analysis of this tax’s impact. It highlights how the TDS, designed to curb speculative activities and enhance traceability within the virtual digital asset (VDA) ecosystem, has fallen short of its objectives. The 1% levy has inadvertently encouraged Indian users to engage with offshore VDA exchange platforms and other untraceable channels, resulting in revenue losses and missed opportunities for India’s digital economy.
A report by the New Indian Express further underscores this point, revealing a significant migration of crypto users to offshore platforms. An estimated three to five million users have moved their trading activities overseas since the TDS’s implementation, leading to a substantial revenue shortfall for the Indian exchequer. Despite collecting Rs 258 crore through the TDS, the majority of which came from domestic exchanges, the amount pales in comparison to the Rs 3,493 crore revenue loss incurred due to this offshore shift. Moreover, the study indicates a strong preference among users and industry executives for a reduction in TDS to 0.01%, suggesting this as a vital corrective measure to motivate trading on domestic platforms and fulfill the original intent of data collection and regulation.
The introduction of TDS on crypto transactions in India presents a cautionary tale in regulatory interventions within emerging digital markets. The policy, while well-intentioned, has had unintended consequences, pushing a significant portion of trading offshore and leading to revenue losses. It underscores the necessity for a balanced approach that recognizes the unique characteristics of the crypto market, ensuring regulatory measures foster growth while maintaining oversight. As India continues to evolve in its digital journey, the lessons learned from the TDS episode will undoubtedly shape future policies in this dynamic sector.
