India is facing a potential loss of over $2 billion in tax revenue from cryptocurrency transactions over the next five years, according to a recent report from the Esya Centre. The report highlights how India’s current tax policies are driving traders to offshore platforms, resulting in missed tax revenue and compliance challenges.
Since July 2022, the government has imposed a 30% capital gains tax on cryptocurrency transactions, without allowing users to offset losses against gains. Additionally, domestic crypto trades are subject to a 1% Tax Deducted at Source. Despite efforts to regulate the sector by bringing virtual digital assets under the Prevention of Money Laundering Act and blocking URLs of non-compliant offshore exchanges, traders are still finding ways to bypass restrictions using VPNs.
Between July 2022 and November 2023, Indian users traded over $12.3 billion worth of virtual digital assets on offshore platforms, with an estimated uncollected Tax Deducted at Source of $417 million during this period. Trading volumes on offshore platforms surged further between December 2023 and October 2024, reaching $31.1 billion, with an estimated uncollected TDS of $311 million. This brings the total uncollected TDS since July 2022 to over $724 million.
While domestic exchanges showed some improvement in early 2024, there was still a significant drop in user activity on major platforms. KUcoin is the only registered foreign exchange deducting TDS through a local entity, but its contribution to offshore trading volumes remains low. If the current trend continues, the report warns that uncollected TDS from offshore crypto trading could exceed $2.1 billion over the next five years.
The report suggests revising Section 194S of the Income Tax Act to make offshore platforms responsible for TDS deductions, even if they are not physically based in India. It also recommends lowering the 1% TDS rate to 0.01% to revitalize domestic trading. Industry stakeholders have been advocating for these changes to address compliance challenges and boost local trading activity. However, regulators have been focused on developing a central bank digital currency, diverting attention from addressing the tax policy issues in the cryptocurrency sector.