After 1% TDS, crypto users shift to offshore platforms, ₹3,500 cr tax goes uncollected: Report
The imposition of a one percent tax-deducted-at-source (TDS) on the trading of virtual digital assets (VDA) in India, has made three to five million users shift to offshore trading platforms, according to a report by the Esya Centre, a New Delhi-based technology policy think tank.
In February 2022, the Ministry of Finance announced the levy of one percent TDS on VDA trade with the intention of discouraging speculative activity and increase traceability in India’s VDA ecosystem. The report ‘‘Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market’’ has found that the move deprived the exchequer of ₹3,493 crore revenues, as against the collected revenue of ₹258 crore.
Additionally, India’s digital economy lost opportunities to the tune of four to five times of this value from the forgone positive externalities, it noted. Out of the ₹258 crore collected, ₹250 crore was paid by domestic Indian VDA exchanges (or 97 per cent of the total amount). On the other hand, only ₹7 crore was collected from trades by Indians on offshore platforms.
‘Opportunity loss’
“VDA tax architecture in India marks a significant opportunity loss in terms of both revenue loss for the exchequer and global competitiveness. There is an urgent need to reduce the TDS to bounce back”, said Dr Vikash Gautam, the author of the report and an Adjunct Fellow at the Esya Centre
Five million Indian users have shifted to offshore platforms, with a single offshore exchange reporting 4,50,000 sign-ups in the month following its implementation in July 2022. Web traffic, active users and downloads by Indians on offshore platforms have increased secularly since July 2022, in tandem with a secular decline in the Indian VDA exchanges in the same period.
The analysis of data on weekly active users, downloads and web traffic shows that the TDS provision and the lack of government respite from this penal tax regime have had the greatest impact on users, who want the levy to be suspended. The impact was in the range of 44 to 74 per cent on these parameters.
A dive into the P2P traders’ data, which was collected from leading offshore exchanges, suggests that over ₹3,50,000 crore worth of VDAs were traded by Indians on offshore platforms between July 2022 and July 2023, accounting for more than 90 percent of the total VDA trade volume by them.
The report noted that its survey of executives at seven leading Indian VDA exchanges finds that the TDS is the most important reason for high offshore P2P trading. Lowering the TDS to 0.01 per cent would be the most important corrective measure to motivate traders to trade on domestic exchanges.