Tax norms weigh on crypto exchanges

India’s crypto tax regime has impacted homegrown crypto exchanges with a sharp drop in trading volumes and outflow in investments to foreign exchanges.

A report by tech policy think tank Esya Centre showed that Indian investors moved more than $3.8 billion ( ₹32,000 crore) worth of crypto investments to global exchanges between February and October 2022.

The government had announced a 30% tax on profits from crypto trading in the Union budget last year, also adding a 1% tax deduction at source (TDS).

The transition from local to global crypto exchanges saw trades originating from India on global exchanges such as Binance, Coinbase and Kraken amount to nearly $9.7 billion between July and October 2022 while domestic exchanges continue to struggle. According to the report, domestic centralized crypto exchanges such as WazirX, CoinDCX and ZebPay saw trading volumes fall by 15% sequentially between February and March last year, after the announcement of two tax rates on ‘virtual digital assets’ (VDAs), which covers cryptocurrencies.

Finance minister Nirmala Sitharaman last year announced a flat 30% capital gains tax rate on both short- and long-term crypto exchanges, and a 1% TDS on any crypto trades executed on a domestic exchange even if a trade is made at a loss.

According to the report, the local crypto industry saw a further 14% sequential drop in April and May after a 15% sequential decline in February and March. The 30% tax rate came into effect from 1 April, 2022. However, the biggest impact on domestic exchanges took place from July onwards, leading to exchanges seeing more than 81% drop in trading volumes. The TDS on crypto transactions came into effect from 1 July.

On 26 September, Mint reported that crypto trading volumes dipped sharply after the 30% tax slab came into effect. Between April and 14 September, trading volume on WazirX plunged 94% to $1.3 million in daily average, from $23.2 million before 1 April. On CoinDCX, daily trade volume fell more than 89% to $1.4 million in the same period. Sathvik Vishwanath, chief executive of homegrown crypto exchange Unocoin, said monthly trading volumes have “continued to remain bad” in the past three months. “The taxation rates have so far looked counterproductive in terms of preventing bulk crypto trades,” he said.

Esya’s report highlighted that while overall crypto investments did post a decline, it is the homegrown exchanges that took the biggest hit with a lack of clear regulatory scenario allowing investors to move to global exchanges. According to the report, around 1.7 million Indian crypto investors shifted their assets to global exchanges. While app downloads of local exchanges dipped 16% sequentially between July and September 2022, foreign exchanges saw downloads rise by a similar amount in the same period.

Vikash Gautam, adjunct fellow at Esya Centre, said reducing the 1% TDS in line with how securities transactions are taxed in India could help stem the outflow of crypto investments to foreign exchanges.

“India’s tax treatment of VDAs is regressive in comparison to other countries with high VDA adoption rates, such as the US, UK, South Africa, Vietnam, Philippines and Brazil. Therefore, the government should adopt a progressive tax structure with differentiated rates for short term and long-term gains, in line with international best practices,” he added.