India’s 1% Tax On Crypto Drives Trading Offshore: Study

Vignesh Karunanidhi
India's 1% TDS On Crypto Drives Trading Offshore: Study

According to a new study, India’s most divisive cryptocurrency policy, a 1% tax on all crypto transactions, needs to be drastically reduced to 0.01% to help the government achieve its goals of increasing revenue and transparency.

The Tax Deducted at Source (TDS), has led roughly 5 million Indian crypto traders to move their transactions offshore. This capital flight has cost the government a potential $420 million in lost revenue since the tax began in July 2022. This comes via a study by New Delhi-based think tank Esya Centre.

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The report shows India’s crypto users shifted $3.8 billion overseas

The findings build on the Esya Centre’s previous report showing Indians shifted over $3.8 billion in crypto trading volume away from domestic exchanges. This shift followed the controversial crypto tax rules. They demonstrate the 1% TDS tax has largely failed to meet one of its main objectives: taxing crypto profits.

“While the crypto market in India is booming, the benefits are being reaped by offshore exchanges,” said Vikash Gautam, the report’s author. “Data shows the tax’s likely goals of curbing speculation and increasing transparency have not been achieved.”

Finance Minister Nirmala Sitharaman said the TDS aimed to boost traceability in India’s crypto ecosystem. Industry participants warned the taxes could cripple the sector. Additionally, trading volumes plummeted after implementation, plunging major Indian exchanges into survival mode.

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The study also urged the government to clarify whether the TDS applies to offshore platforms. It notes that enforcement would be tough without international cooperation.

The report estimated that by slashing the TDS to 0.01%, the government could generate over $1.5 billion in tax revenue over five years and achieve its transparency goals. So far, the controversial tax has mainly succeeded in pushing crypto trading out of India. The tax is depriving authorities of revenue and insight into transactions.