India could lose over $2 billion in tax revenue from cryptocurrency transactions over the next five years, warns a report by technology think tank Esya Centre. High tax rates and stringent compliance burdens are driving traders to offshore platforms, undermining the government’s efforts to regulate the sector.
Missed Revenue and Migration to Offshore Platforms
Since July 2022, India has foregone more than ₹6,000 crore (approximately $724 million) in Tax Deducted at Source (TDS) from cryptocurrency trades, as users increasingly migrate to offshore exchanges. Indian traders conducted over ₹1.03 lakh crore ($12.3 billion) worth of virtual digital asset (VDA) transactions on offshore platforms between July 2022 and November 2023, evading compliance with domestic tax regulations.
The trend accelerated in 2024, with trading volumes on offshore exchanges reaching ₹2.63 lakh crore ($31.1 billion) by October. This contributed an estimated ₹2,634 crore ($311 million) to the growing pool of uncollected TDS, pushing the cumulative shortfall to over ₹6,000 crore since mid-2022.
India’s Tax Framework: A Double-Edged Sword
India imposes a 30% capital gains tax on cryptocurrency transactions, disallowing loss offsets, and mandates a 1% TDS on domestic crypto trades. These measures, introduced to ensure tax compliance and revenue generation, have inadvertently incentivized traders to use offshore platforms, which dominate trading volumes.
Efforts to curb evasion, including bringing VDAs under the Prevention of Money Laundering Act (PMLA) and blocking non-compliant exchange URLs, have had limited success. Traders bypass restrictions using VPNs, leaving domestic exchanges struggling with reduced activity—web traffic on major platforms dropped by 34% in early 2024.
Challenges in Offshore Compliance
Only one foreign platform, KUcoin, registered with India’s Financial Intelligence Unit (FIU) and began deducting TDS in March 2024. However, its impact is minimal, contributing less than 5% to offshore trading volumes by Indian users. Current regulations do not compel offshore platforms to establish local subsidiaries or ensure tax compliance, exacerbating revenue losses.
Recommendations for Policy Reforms
To address these challenges, the Esya Centre recommends revising Section 194S of the Income Tax Act to make offshore platforms liable for TDS deductions, regardless of their physical presence in India. Additionally, reducing the TDS rate from 1% to 0.01% could encourage compliance and revitalise domestic trading.
Industry stakeholders have long called for such reforms, arguing that the ability to offset losses and lower TDS rates would boost the domestic crypto ecosystem. However, regulatory authorities remain unresponsive, with the government’s focus largely centred on developing a central bank digital currency (CBDC).
The Road Ahead
If the current trajectory continues, uncollected TDS from offshore trading could exceed ₹17,700 crore ($2.1 billion) in the next five years. Policymakers face a crucial choice: adapt the tax framework to foster compliance or risk further erosion of revenue as traders and transactions shift abroad.
India’s cryptocurrency market, once poised for growth, now stands at a crossroads. Clear and pragmatic reforms could hold the key to bridging the tax gap while bolstering the domestic crypto ecosystem.
