According to the Esya Centre, an Indian think tank, the controversial Indian crypto tax policy was a failed exercise. Over five million traders have been forced offshore due to the action intended to reduce speculative trading and increase traceability. As a result, exchanges are now hoping for some tax relief in the upcoming fiscal year.

In 2022, the government of India imposed a 1% Tax Deducted at Source (TDS) on cryptocurrency transactions. Indians who are impacted are now conducting business at exchanges that the tax collector cannot access, even though this was intended to promote transparency and boost tax revenues for the exchequer.

Users Elect to Avoid The Controversial Indian Crypto Tax Policy

The 2022 Controversial Indian Crypto Tax Policy Was a Failed Exercise

The government also imposed a 30% capital gains tax on profits in April 2022 and TDS. Furthermore, capital gains tax from one asset could not be used to offset taxes on profits from other assets.

Some users assessed the risk of not reporting against the chance that the government would find unreported local revenue when the reporting requirements increased. Ultimately, the majority decided not to disclose their foreign exchange earnings.

The report’s author, Vikash Gautam, an adjunct fellow at the Esya Centre, stated:

“Reducing the TDS in particular is urgently needed to address this, benefiting investors and consumers in virtual digital assets (VDA) and the Indian economy.”

Exchanges are also defined as reporting institutions under the Prevention of Money Laundering Act (PMLA). Noncompliant enterprises may be imprisoned for seven years without disclosing TDS.

However, if more Indian users migrate offshore, compliant exchanges may receive fewer crypto taxes, harming the government’s revenue prospects. The government received $19.2 million in tax income during the fiscal year 2023.

Exchanges Anticipate Tax Relief

The 2022 Controversial Indian Crypto Tax Policy Was a Failed Exercise

Since the July 2022 introduction of the TDS tax, there has been a notable decline in trading on Indian exchanges such as CoinDCX, WazirX, and CoinSwitch.

Based on variations in the number of unique visitors per week, Esya calculates that between three and five million Indian users migrated to other countries, with one foreign platform registering 450,000 new users in the month following the implementation of the TDS tax.

12% of CoinDCX’s employees were let off in August 2022 due to unfavorable regulations and the weak market. Trading volumes on Indian markets decreased to $137 million by October from $4.7 billion at the start of the year.

Esya has already estimated that by 2026, exchanges might lose as much as $1.2 trillion. Indian cryptocurrency companies, therefore, anticipate that the government will provide some tax relief in the Union Budget for 2023–2024.

In conclusion, the dynamic nature of the crypto space requires policymakers to adopt regulations to keep pace with technological advancements and global trends.

A failed crypto tax policy could have negative economic consequences, including reduced tax revenue, hampered economic activity in the crypto space, and potential capital flight.