India has been facing a significant loss in tax revenue due to its current crypto tax policies, as highlighted in a recent report by the Esya Centre. The country missed out on a staggering ₹6,000 crore in taxes as crypto traders shifted their operations to foreign platforms. If the existing policies are not revised, India could potentially lose an additional ₹17,700 crore over the next five years.
The introduction of a 1% TDS (Tax Deducted at Source) on crypto transactions in July 2022 was intended to regulate trading activities and ensure tax compliance. However, this measure had unintended consequences, with many traders opting to use offshore platforms to evade the tax obligations imposed by the government.
Between December 2023 and October 2024, Indian investors engaged in trading activities worth over ₹2,63,000 crore on foreign exchanges. Despite the government’s efforts to block nine major offshore platforms in January 2024, only one platform has adhered to the TDS regulations. Traders have resorted to using VPNs and alternative applications to bypass restrictions, leading to a substantial 77% increase in trading activity on foreign platforms compared to a mere 21% growth on domestic exchanges.
To address the ongoing tax revenue challenges in the crypto sector, the Esya Centre has proposed several key reforms. These include reducing the TDS rate to 0.01% to alleviate the tax burden on traders and incentivize them to utilize Indian platforms. Additionally, amending relevant tax laws such as Sections 194S and 115BBH of the Income Tax Act would ensure tax compliance from offshore platforms operating in India, even if they do not have a physical presence. Simplifying regulations to allow foreign platforms to register and operate under local laws could further enhance compliance and revenue collection efforts.
Implementation of these reforms in the upcoming budget could potentially generate between ₹9,169 crore to ₹18,338 crore in tax revenue over the next five years. This would not only bolster the domestic crypto ecosystem but also discourage traders from relying on foreign platforms for their transactions.
Establishing a balanced and trader-friendly tax policy is crucial to capitalize on the growth of the crypto market in India. By enhancing regulations, the government can instill investor confidence, retain capital within the country, and unlock the full potential of the crypto economy on a national scale.