The deregulated market of virtual digital assets (VDAs) seems to have received further push due to the ironically imposed regulations from India, with web traffic to nine blocked exchanges jumping 57 per cent from January 2024 to October 2024, according to an update published by Delhi-based technology policy thinktank, Esya Centre, this month.
In a special issue titled ‘The Impact of India’s VDA Tax Policy: An Update’, the centre further elaborated on the report ‘Taxes and Takedowns: An Assessment of India’s Key Policy Tools for Virtual Digital Asset Markets’ (Gautam and Sharma 2024) published back in May this year.
Between December 2023 and October 2024, Indians traded a whopping Rs 2.63 lakh crore on offshore platforms, the update said. This included blocked exchanges. In line with the latest taxation rules, this meant that Rs 2,634 crore was owed in TDS by the offshore platforms.
This also sums up to more than Rs 6,000 crore owed to India by offshore exchanges in uncollected TDS since the implementation of the Tax Deducted at Source system for VDAs in July 2022.
While domestic exchanges saw a marked improvement when the year began, it could be “potentially attributable to enforcement actions against offshore platforms in January 2024,” said the report.
“Long-term trends indicate a continued migration of Indian users to offshore platforms. Web traffic from Indian users to domestic exchanges—including CoinDCX, CoinSwitch, WazirX, Mudrex, Giottus, Zebpay, and Bitbns—declined by 34 per cent since the beginning of the year,” it added.
During the same time (January to October 2024), offshore platforms saw Indian activity shoot up by 77 per cent, with users circumventing archaic restrictions with private networks (VPNs) and mirror platforms or servers or even migrating completely to non-compliant exchanges.
The Esya Centre report estimates total trading volume by Indians on offshore platforms alone to hit Rs 17.7 lakh crore in the next five years, resulting in at least Rs 17,700 crore in uncollected TDS.
An overhaul in VDA tax policy may benefit India
The study, however, sees 82 per cent of Indian users returning to trading through domestic or compliant platforms if the TDS is cut to 0.01 per cent (like securities and commodities) and the domestic platform asset share reverts to levels before February 2022. This shift could generate tax revenue between Rs 9,169 crore and Rs 18,338 crore over the next five years (assuming 50-100 per cent of VDA profits traded annually), projected the research.
The Esya Centre update recommended amendments to certain subsections of the income tax act, including defining “intermediaries such as exchanges as ‘persons responsible’ for deducting TDS on VDA transactions, even if they do not directly handle payments” and introducing “provisions mandating that offshore platforms comply with local tax laws, irrespective of their physical presence in India” (subsections 194S and 115BBH of the IT Act).
Other recommendations included the allowance for taxpayers to offset losses against gains in VDA trades, carryforwarding of unutilised losses, cutting the TDS rate to 0.01 per cent, and implementing a reporting mechanism for declaring VDA transactions without imposing high transaction costs.
Lastly, the report also bats for establishing a registration regime for VDA intermediaries and introducing consumer protection requirements. The last set of recommendations may be tricky given that most VDA are regulated cryptocurrencies, and they do not take lightly to any centralised regulations.
