Indian Crypto Tax Rules Push 90% Trading Offshore, Costing Government Billions

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AuthorAbhay Singh|Published at:
Indian Crypto Tax Rules Push 90% Trading Offshore, Costing Government Billions
Overview

India's strict 1% tax deducted at source (TDS) on virtual digital assets (VDAs) is driving over 90% of Indian crypto trading to offshore exchanges, according to a CoinDCX-backed report. This has led to an estimated ₹11,000 crore in uncollected TDS and could result in a potential loss of up to ₹39,971 crore over the next five years if current policies continue. The report recommends measures like lowering TDS rates and bringing offshore platforms under Indian jurisdiction to boost compliance and protect investors.

India's taxation framework for virtual digital assets (VDAs), including cryptocurrencies, is facing scrutiny due to its impact on trading behaviour. Profits from VDA sales are taxed at a flat 30% under Section 115BBH of the Income Tax Act, with additional cess and surcharge. A significant measure is the 1% Tax Deducted at Source (TDS) mandated under Section 194S for all VDA transfers, affecting both individuals and institutions.

To enhance transparency, the income tax return (ITR) form will include a dedicated Schedule VDA from FY2025-26 to report all crypto-related activities. Compliance is further enforced by Section 271C, which imposes penalties, interest, and even imprisonment for failure to deduct or remit TDS.

However, an industry-backed research report from CoinDCX highlights a substantial consequence: the 1% TDS has significantly boosted activity on offshore exchanges. Over 90% of Indian crypto trading now occurs on these platforms, leading to an estimated ₹11,000 crore in uncollected TDS. Projections indicate that India could forgo up to ₹39,971 crore in TDS over the next five years if the current tax structure remains unchanged.

The report suggests solutions such as lowering TDS rates, allowing the offset of trading losses, bringing offshore exchanges under Indian regulatory jurisdiction, and aligning VDA taxation with global standards. Sumit Gupta, Co-Founder at CoinDCX, believes these changes would foster a more transparent crypto tax environment, support domestic exchanges, and safeguard investor interests.

Impact
This news has a significant impact on the Indian cryptocurrency market and government revenue. The shift to offshore exchanges suggests potential capital flight and difficulty in tax collection, which could lead to policy revisions by the Indian government. The projected revenue loss indicates a need for recalibration of the taxation strategy for digital assets.
Impact Rating: 7/10

Definitions of Difficult Terms

  • Virtual Digital Assets (VDAs): These are digital assets that have no physical existence but possess economic value. Examples include cryptocurrencies (like Bitcoin, Ethereum), Non-Fungible Tokens (NFTs), and other digital tokens.
  • Tax Deducted at Source (TDS): A form of direct tax collection where a specified percentage of payment is deducted by the payer at the time of making the payment to the recipient and deposited directly with the government. It acts as an advance tax.
  • Income Tax Act: The primary legislation governing direct taxation in India.
  • Schedule VDA: A specific section or form within the Income Tax Return (ITR) designed for taxpayers to declare and report income or losses from Virtual Digital Assets.
  • Offshore Exchanges: Cryptocurrency exchanges that are registered and operate from outside India.
  • Jurisdiction: The authority and power of a government or legal system to make legal decisions and judgments over individuals, property, or events within its territory.
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