Indian cryptocurrency tax rules, which came into effect last April, have resulted in local exchanges giving up the lion’s share of the market to those operated by foreign players, according to a new report.
Binance, Coinbase and other overseas exchanges held 67.6% of the cryptocurrency market share in India in October 2022, up from 50% in November 2021, according to New Delhi-based think tank Esya.
During the period between February 2022, when India unveiled its cryptocurrency taxation policy, and October 2022, $3.8 billion in trading volume shifted from domestic centralized to offshore managed exchanges, states the report (PDF).
Indian exchanges including WazirX, CoinSwitch and CoinDCX lost a whopping 81% of their trading volume in the four months between July and October, Esya said, attributing the trend to local TDS rules.
India is among the nations that have taken a rigorous approach to cryptocurrencies. It began taxing virtual currencies in April last year, placing a 30% tax on earnings and a 1% deduction on each crypto transaction.
The report argues that traders are moving to overseas exchanges because they believe they will be able to disguise their activities from local authorities. Many of the foreign exchanges, including Binance, offer peer-to-peer on-ramp and off-ramp capability, allowing users to avoid having to transact with a company.
Additionally, many foreign exchanges, including KuCoin and Gate, allow trading of cryptocurrencies within a certain capital limit (typically a few thousand dollars per day) without KYC details. Decentralized exchanges like DYDX, by design, do not require KYC. Top executives of Indian stock exchanges have warned in the past that India’s tax regime will force users to switch to unregulated entities.
“This implies that India is not only losing international competitiveness in the VDA (virtual digital asset) ecosystem, which is closely related to several emerging technologies, but also low liquidity which is important for concurrent economic value creation in the country. “, Esias wrote.
“Importantly, the implications of the current VDA architecture on government tax revenues are also unclear.”
The report urges the Indian government to reassess its taxation on cryptocurrencies, suggesting that it at least waive the 1% TDS levy on transactions.
The vast majority of local authorities remain one of the most vocal opponents of cryptocurrencies. Last month the governor of India’s central bank warned that private cryptocurrencies will cause the next financial crisis unless their use is prohibited.
The central bank said last week that India, under its current G20 presidency, will prioritize developing a framework for global regulation of unsupported cryptocurrencies, stablecoins and decentralized finance and explore the “possibility of [their] prohibition.”