Crypto Tax Conundrum: Calls for Reform as India’s 1% TDS Sparks Exodus

A recent study conducted by the Esya Centre, a New Delhi-based technology policy think tank, has reignited the debate over India’s crypto tax policy. The study suggests that the 1% transaction tax deducted at source (TDS), a contentious element of the government’s crypto regulations, needs a significant reduction to 0.01% to align with the goals of boosting revenue and enhancing transparency.

According to the “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market,” the TDS has had unintended consequences, prompting an estimated 5 million crypto traders to shift their transactions offshore. This exodus has allegedly cost the Indian government a substantial $420 million in potential revenue since the policy’s introduction in July 2022.

The findings build on the think tank’s earlier report, revealing that Indians moved over $3.8 billion in trading volume from local to international crypto exchanges following the announcement of the controversial crypto rules. The current study goes further, indicating that the TDS has fallen short of achieving its intended objectives, particularly in taxing profits and curbing speculation.

Vikash Gautam, the author of the report, noted, “While the VDA market in India is burgeoning, the benefits of the same are being reaped by offshore exchanges. Data shows that two likely policy objectives of the tax – to curb speculation and create transparency around transactions – have not been achieved.”

The TDS was introduced alongside a 30% tax on crypto profits by Prime Minister Narendra Modi’s government in February 2022. Finance Minister Nirmala Sitharaman explained that the TDS aimed to enhance traceability within India’s crypto ecosystem. However, the crypto community, both domestic and international, raised concerns about the potential negative impact on the industry.

The aftermath of the TDS implementation saw a sharp decline in Indian crypto traffic, putting major exchanges in survival mode. Representatives of the domestic crypto industry have consistently urged authorities to reconsider and reduce the tax burden.

The study, which analyzed transaction volumes from 13,000 peer-to-peer (P2P) traders and surveyed crypto exchange executives, questions the efficacy of the TDS in achieving its dual objectives. The taxation policy not only failed to deter speculative activity but also led to a substantial shift of crypto transactions to offshore platforms.

As the crypto community grapples with the implications of the TDS, calls for a revision of the tax rate to 0.01% are gaining momentum. The debate over India’s crypto policies continues, with stakeholders urging the government to strike a balance between revenue generation and fostering a thriving crypto ecosystem.

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