Indian crypto taxes led over $3.8bn in investments moved to foreign exchanges

Even as India’s existing crypto tax regime has taken its toll on homegrown crypto exchanges, it may not have deterred investors per se. According to a report by tech policy think tank Esya Centre, Indian investors moved over $3.8 billion (₹32,000 crore) worth of crypto investments to global exchanges between February and October 2022. The government announced a 30% tax on profits from crypto trading at the Union Budget last year, and added a 1% tax deduction at source (TDS) later.

The transition from domestic to global crypto exchanges saw trades originating from India on global exchanges like Binance, Coinbase and Kraken amount to nearly $9.7 billion between July and October last year — while domestic exchanges continue to struggle.

According to the report, domestic centralized crypto exchanges such as WazirX, CoinDCX and CoinSwitch saw trading volumes decline by 15% sequentially between February and March last year, following the announcement of two tax rates on ‘virtual digital assets’ (VDAs) — which covers cryptocurrencies. At the Union Budget 2022 speech, union finance minister Nirmala Sitharaman announced a flat 30% capital gains tax rate on both short- and long-term crypto exchanges, and a 1% tax deducted at source (TDS) on any crypto trade executed on a domestic exchange — even if the trade is a loss.

The data states that  the local crypto industry saw a further 14% sequential decline in April and May after a 15% sequential decline in February and March. The 30% tax rate came into effect from April 1, 2022. 

However, the biggest impact on domestic exchanges took place from July onward, leading to exchanges seeing over 81% trade volume declines. The TDS on crypto transactions came into effect from July 1.

On September 26 last year, Mint reported that crypto trading volumes dipped sharply following the 30% tax slab coming into effect. Between April and September 14, trading volume on WazirX declined by 94% — down to $1.3 million in daily average, from $23.2 million before April 1.On CoinDCX, daily trade volume dipped by over 89% to $1.4 million in the same time period.

According to Sathvik Vishwanath, chief executive of homegrown crypto exchange Unocoin,  monthly trade volumes have “continued to remain bad” over the past three months. “The taxation rates have so far looked counterproductive in terms of preventing bulk crypto trades. Various exchanges are trying different tactics, but nothing has been particularly successful so far,” Vishwanath added.

Esya’s report highlighted that while overall crypto investments did dip, it is the homegrown exchanges that took the biggest hit — with a lack of clear regulatory environment allowing investors to move to global exchanges. According to the report, approximately 1.7 million Indian crypto investors shifted their assets to global exchanges. While app downloads of local exchanges dipped 16% sequentially between July and September last year, foreign ones saw a same rate of spike in downloads during the same period.

Vikash Gautam, adjunct fellow at Esya Centre, said that reducing the 1% TDS in line with how securities transactions are taxed in the country could help prevent the outflow of crypto investments to foreign exchanges.

“India’s tax treatment of VDAs is regressive in comparison to other countries with high VDA adoption rates, such as the USA, UK, South Africa, Vietnam, Philippines and Brazil. Therefore, the government should adopt a progressive tax structure with differentiated rates for short term and long-term gains, in line with international best practices,” he added.