In a recent study conducted by the Esya Centre, a New Delhi-based technology policy think tank, the controversial 1% Tax Deducted at Source (TDS) crypto tax policy in India is under scrutiny. The study suggests that the government’s ambitious aims of boosting revenue and enhancing transparency have not been met, leading to a potential loss of $420 million in revenue.
The Exodus Effect: Shifting Transactions Offshore
Introduced in July 2022, India’s crypto tax policy included a hefty 30% tax on crypto profits and a 1% TDS on all transactions. However, the study reveals that this move prompted a significant exodus, with up to 5 million crypto traders shifting their transactions offshore, causing a substantial decline in local crypto activity.
Proposed Solution: Drastic Reduction to 0.01% TDS
The Esya Centre proposes a noteworthy solution based on its findings: the controversial 1% TDS should be drastically reduced to 0.01%. According to Vikash Gautam, the author of the report, this adjustment is crucial for the government to achieve its intended objectives and recover from the financial setback.
Key Observations
The study, titled “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market,” expands on the think tank’s previous report, which highlighted a migration of over $3.8 billion in trading volume from local to international crypto exchanges following the implementation of the contentious crypto rules.
Unmet Objectives: Failure to Tax Profits and Boost Transparency
One of the study’s key observations is that the tax failed to achieve its stated aims, particularly in taxing individuals earning profits. Despite a burgeoning Virtual Digital Asset (VDA) market in India, the benefits seem to be reaped by offshore exchanges rather than the domestic market. This raises questions about the efficacy of the tax in curbing speculation and creating transparency in crypto transactions.
Industry Backlash and Continuous Appeals
The government’s initial announcement of the 30% tax on crypto profits and the 1% TDS in February 2022 faced strong opposition from both domestic and international participants. Finance Minister Nirmala Sitharaman defended the TDS, emphasizing its role in increasing traceability in India’s crypto ecosystem. However, the subsequent decline in Indian crypto traffic, forcing major exchanges into survival mode, signaled potential negative repercussions for the industry.
Lingering Ambiguity: Call for Clarity on TDS Applicability to Offshore Platforms
Representatives of the domestic crypto industry have consistently appealed to authorities to reconsider the tax rates. The study suggests that apart from the intended goals of tracing transactions, the TDS was also meant to discourage speculative activity in the crypto market. Notably, the study calls for the government to provide clarity on the applicability of TDS to offshore platforms. Vikash Gautam, in an interview, emphasized the current impracticality of enforcement, stating that international cooperation would be necessary but acknowledging the complexity of such arrangements.
As the Finance Ministry remains silent on the study’s findings, the debate around India’s crypto tax policy continues, with the Esya Centre advocating for a significant reduction to revive the crypto industry’s growth within the country.
