India risks losing $2b in tax revenue as crypto traders shift to offshore platforms: report

India could lose more than $2 billion in tax revenue from cryptocurrency transactions over the next five years due to tax policies that direct traders to offshore platforms, according to a recent report.

A December report by Indian technology think tank Esya Center reveals that the government has missed out on collecting over INR 6,000 crore (about $724 million) in tax revenue from virtual digital assets since July 2022 as traders migrated to overseas exchanges to avoid compliance burdens. high tax rates.

After lifting its shadow ban in 2018, India imposed a 30% capital gains tax on cryptocurrency transactions; This does not allow users to offset losses against gains while also subjecting local crypto trading to a 1% Tax Deduction at Source.

In addition, the government has sought to regulate the industry by bringing VDAs under the Prevention of Money Laundering Act (PMLA) and blocking URLs of non-compliant offshore exchanges to curb tax evasion and improve oversight.

However, the report highlights that these measures are largely ineffective as traders continue to bypass restrictions by using VPNs and offshore platforms still dominate trading volumes.

Notably, between July 2022 and November 2023, Indian users traded VDA worth INR 1.03 lakh crore (approximately $12.3 billion) on offshore platforms, including blocked exchanges, and the cumulative uncollected TDS during this period was INR 3,493 crore ( It is estimated to exceed approximately $417 million. period.

Between December 2023 and October 2024, trading volumes on offshore platforms increased further to Rs 2.63 lakh crore (approximately $31.1 billion). This translates to an estimated INR 2,634 INR TDS (about $311 million) owed by offshore platforms, taking the total TDS outstanding since July 2022 to over INR 6,000 INR, the report said.

On the other hand, although domestic stock markets showed some recovery in early 2024, the general trend showed that locals continued to migrate to offshore platforms; web traffic data shows a 34% decline in user activity on major domestic platforms since the beginning of the year.

Currently, KUcoin is the only FIU registered currency that has started TDS deduction through a local entity in March 2024. However, the contribution of Indian users to overall offshore trading volumes remains below 5%.

If the current trend continues, the report warned that uncollected TDS from offshore crypto trading could exceed Rs 17,700 crore (about $2.1 billion) in the next five years.

India should review its tax policy

“The current regulatory framework disproportionately impacts compliant users and organizations, but does not address the root causes of non-compliance,” the report added, noting that registering with the Financial Intelligence Unit does not oblige offshore exchanges to establish local subsidiaries or ensure tax compliance.

To overcome these challenges, the report recommended revising Section 194S of the Income Tax Act to make offshore platforms liable for TDS deductions even if they are not physically in India and also reduce the 1% TDS rate to 0.01%.

Industry stakeholders have repeatedly pushed for a lower TDS rate and compensation for losses, arguing that these changes could boost domestic trade. But regulators have been largely silent on the issue, as much of the country’s focus has turned to developing its central bank digital currency.