announced a 30% tax on the income from the transfer of virtual assets, as per a study by Esya Centre, a New Delhi-based technology policy think tank.
Of this, a cumulative volume of 25,300 crore ($3.05 billion) was offshored within six months of the current financial year, said the report.
The study, titled Virtual Digital Asset Tax Architecture in India: A Critical Examination, is the first empirical exercise to estimate the impact of India’s tax policy on centralised crypto exchanges in the country.
A key point that the research threw up was that the main (unintended) impact of the policy was the offshoring of domestic liquidity to foreign exchanges.
The researchers said they 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 tax policy seems to have overlooked two important aspects: Tax rates, like price changes, not only decrease consumption of a given product (i.e., trading through Indian VDA exchanges), but shift demand towards other products (i.e., trading through foreign VDA exchanges). National boundaries are porous in the digital economy, so staying internationally competitive is critical,” said Vikash Gautam, adjunct fellow at Esya Centre.
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Following the announcement in the Budget 2022 of a 30% tax on gains, 1% TDS and no provision to offset losses, domestic centralised crypto exchanges saw a 15% drop in trading volumes in February and March 2022.
The implementation of a 1% TDS had the most significant impact on trading volumes among these three tax measures, and Indian VDA exchanges ended up losing up to 81% of their trading volumes in four months (i.e., July-October 2022) following the levy.
Following the announcement of the crypto tax, Indian crypto investors switched from domestic exchanges to foreign counterparts (an estimated 1.7 million users switched during the period studied), a trend that will be visible beginning February 2022, according to the report.
India was one of the
fastest growing crypto markets in the world in 2021, but after the aggressive taxation policy, crypto adoption by Indians, as measured by mobile app downloads, fell by a sizable 16% on a month-on-month basis for domestic exchanges, while increasing by the same amount for foreign exchanges, during July-September 2022.
The firm used a methodology that included change-in-change (CIC), a causal method, to estimate the impact of tax events on centralised exchange volumes. Most of the volume and value data was obtained from CoinGecko. The firm did a comparison of Indian tax regulations (i.e., tax rate, TDS applicability and loss set-off provision) with countries with high VDA adoption rates (US, UK, Canada, Brazil, etc.) using Chainalysis data. And scenario-based projections for the future path of crypto exchange volumes were done using SE Ranking data used to understand web traffic on Indian and foreign VDA exchanges.
The think tank has estimated that the current tax structure could result in a loss of around $1.2 trillion in local exchange trade volume over the next four years, compared to a pro-market scenario where TDS on VDAs was equal to that on securities, tax policy allowed for the offset of losses and the taxation of gains from VDAs was competitive with international standards. “The government should consider lowering the TDS rate to reduce its distortionary effect, especially since any TDS rate can meet the transaction tracking purpose,” Gautam said.