Up to 5 million crypto users shifted to offshore trading platforms: Report

The implementation of a 1 per cent tax deducted at source (TDS) on virtual digital asset (VDA) transactions in India has reportedly led to a migration of between 3 to 5 million users to foreign trading platforms, according to a report by the Esya Centre, a technology policy think tank based in New Delhi.

In February 2022, the Union Ministry of Finance announced the levy of 1 per cent TDS on VDA trade with the intention of discouraging speculative activity and increase traceability in India’s VDA ecosystem. Instead, the Esya Centre report, titled “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market”, found that the move deprived the exchequer of Rs 3,493 crore of revenues, as against the collected revenue of Rs 258 crore.

“The VDA tax architecture in India is a lost opportunity in terms of revenues for the exchequer and localisation of the VDA industry. While the VDA market in India is burgeoning, the benefits of the same are being reaped by offshore exchanges. Data shows that two likely policy objectives of the tax—to curb speculation and create transparency around transactions—have not been achieved. There is an urgent need to reduce the TDS in particular to fix this to the benefit of the Indian economy and VDA investors / consumers” said Vikash Gautam, the author of the report and an Adjunct Fellow at the Esya Centre.  

Out of the Rs 258 crore collected, Rs 250 crore was paid by domestic Indian VDA exchanges—or 97% of the total amount. On the other hand, only Rs 7 crore was collected from trades by Indians on offshore platforms, only 0.2% of the Rs 3,500 crore that should have been collected.

The Esya Centre report used data from Indian and global VDA ecosystems, analysed transaction volumes from 13,000 peer-to-peer (P2P) traders and conducted a survey of executives working at India’s VDA exchanges to assess the impact of the one percent TDS levy. The study revealed a few key insights.

First, it found that 3 to 5 million Indian users have shifted to offshore platforms since the TDS was announced in February 2022, with a single offshore exchange reporting 450,000 signups 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 on Indian VDA exchanges in the same period.  

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Second, a causal analysis of data on weekly active users, downloads and web traffic shows that the TDS provision and the lack of government respite have had the greatest impact on users, who want the levy to be suspended. The impact was in the range of 44% to 74% on these parameters.  

Third, a deep dive into the P2P traders data, collected from leading offshore exchanges, suggests that over Rs 3.5 lakh crore worth of VDAs were traded by Indians on offshore platforms between July 2022 and July 2023, accounting for more than 90 per cent of the total VDA trade volume by them.