Indians moved over $3.8b to foreign exchanges since crypto tax rules: Research study

Indians moved more than $3.8 billion in cumulative trading volume from local to international crypto exchanges after the nation announced stiff crypto tax rules on Feb. 1, 2022, according to a research study by Esya Centre, a New Delhi-based technology policy think tank.

A total of $3.852 billion (INR 32,000 crore) was shifted during Feb-Oct 2022. "Of this, cumulative volume of $3,055 million was offshored within six months of the current financial year," the report said.

The report assumes significance as it provides the first monetary estimate of the impact of India's controversial crypto tax policy on domestic exchanges. Prime Minister Narendra Modi’s government announced a 30% tax on crypto profits and a 1% tax deducted at source (TDS) on all transactions on Feb. 1, 2022.

The 30% tax was effective April 1 onwards and the 1% TDS was effective July 1 onwards. When the taxes were announced the industry was unable to back up its prediction that these would "kill liquidity." The Esya Centre report found that domestic exchanges lost 81% of their trading volumes in four months after the imposition of the much debated 1% TDS rule.

Days before the 30% tax came into effect, Nischal Shetty, CEO and founder of WazirX, one of India's biggest exchanges, said what people will do now "is find ways to not be part of the [domestic] system because people are not going to leave crypto." The Esya Centre report found that "an estimated 17 lakh users switched" from domestic crypto exchanges to foreign counterparts.

Recent studies reflected that India crypto traffic took a nosedive as the government imposed its crypto tax policy but this report goes further in predicting that "centralised exchange businesses would become unviable" in India if the current scenario continues.

"We anticipate a commensurately large negative impact on tax revenues, as well as a decrease in transaction traceability – which defeats the two central goals of the extant policy architecture," the report said. "The current tax architecture may lead to a loss of approximately $1.2 trillion of local exchange trade volume in the next four years," it added.

The report said India's Virtual Digital Asset (VDA) industry is "crippled under the current tax architecture" and that the "baseline scenario" under the current structure is that "almost all" Indian centralised VDA users will move to foreign exchanges.

As an alternative to the current tax regime, the researchers recommend TDS should be changed from 1% per transaction to 0.1% which would be at par with the securities transaction tax, and allowing the setoff of losses. The study also recommended progressive taxes on gains instead of the flat 30% tax.

As a current account deficit nation at an all-time high of $36.4 billion, India requires money to flow in as opposed to outflows to offshore exchanges bypassing banking channels. The latest findings might put pressure on authorities to clamp down on outflows through crypto that add to India's current account deficit.