India’s stringent crypto tax policies are driving traders to offshore platforms, jeopardising over $2 billion in tax revenue over the next five years, according to a recent report by the Esya Centre.
Missed Revenue from Offshore Platforms
Since July 2022, India has missed out on approximately ₹6,000 crore ($724 million) in tax revenue from cryptocurrency transactions. Indian users traded over ₹1.03 lakh crore ($12.3 billion) worth of virtual digital assets (VDAs) on offshore exchanges between July 2022 and November 2023. The figure surged to ₹2.63 lakh crore ($31.1 billion) between December 2023 and October 2024.
These transactions circumvent domestic tax regulations, with the total uncollected Tax Deducted at Source (TDS) exceeding ₹6,000 crore to date. The report predicts uncollected TDS could surpass ₹17,700 crore ($2.1 billion) over the next five years if the trend continues.
High Taxes and Regulatory Burdens
India’s tax policies impose a 30% capital gains tax on cryptocurrency transactions, disallowing the offsetting of losses against gains. Additionally, a 1% TDS applies to all domestic crypto trades. These measures, combined with efforts to block non-compliant offshore exchanges under the Prevention of Money Laundering Act (PMLA), have been largely ineffective.
Many traders evade these restrictions by using VPNs, with offshore platforms dominating trading volumes. Domestic exchanges, meanwhile, have seen a 34% drop in user activity in early 2024, according to web traffic data.
KUcoin remains the only Financial Intelligence Unit (FIU)-registered foreign exchange to begin TDS deductions through a local entity in March 2024. However, its contribution to overall offshore trading volumes by Indian users remains under 5%, highlighting the limited effectiveness of existing regulatory measures.
Recommendations for Policy Revisions
The Esya Centre recommends revising Section 194S of the Income Tax Act to make offshore platforms responsible for TDS deductions, regardless of their physical presence in India. It also suggests lowering the TDS rate from 1% to 0.01% to encourage compliance.
Industry stakeholders have long advocated for reducing the TDS rate and allowing loss offsets to revitalise domestic trading. However, regulators have yet to respond, focusing instead on the development of a central bank digital currency.
The Road Ahead
India faces a critical decision: revise its tax framework to retain crypto traders and boost compliance or risk losing billions in revenue as users continue migrating to offshore platforms. Without a balanced approach, the government’s vision for a robust digital asset ecosystem may remain unfulfilled.
