Markets
To dodge crypto tax, Indian users take global exchange route
Summary
India’s tax on cryptocurrency transactions is becoming a boon for international exchanges, as users transact in overseas exchanges to avoid paying the 1% TDS imposed in July. Among the beneficiaries: International platforms such as Binance and KuCoinNEW DELHI : India’s tax on cryptocurrency transactions is becoming a boon for international exchanges, as users transact in overseas exchanges to avoid paying the 1% tax deduction at source (TDS) imposed in July. Among the beneficiaries: International platforms such as Binance and KuCoin.
According to data from AppTweaks, an app analytics platform, shared by industry executives, Binance alone was downloaded 750,000 times by Indian users in June and July. In addition, Seychelles-based KuCoin and US-based Coinbase got almost 200,000 downloads each, while some 16,000 users also downloaded San Francisco-based Kraken.
About 40-50% of downloads usually convert to active users, an executive from crypto exchange WazirX said on the condition of anonymity.
“Our sense is that investors are moving to foreign, centralized and decentralized exchanges—thus unwittingly being non-compliant with Indian laws," WazirX said in a statement. “Data as to how much is difficult to assess—one proxy for this phenomenon could be app installs—foreign exchanges saw a jump in app installed during this period while Indian exchange’s app installs remained constant," it added.
India’s new tax rules require exchanges to levy a 1% TDS on crypto transactions and submit the same to the income tax department on behalf of the user. Crypto exchanges apply this tax when a user places an order, thereby reducing their net gains, to avoid slippage (difference in the expected price of an order and the price when it is actually executed).
International exchanges, however, do not apply these taxes and operate as before. As a result, crypto assets can be transferred from wallets on Indian to global exchanges by transacting over blockchains. While users doing this incur a one-time transaction fee, called a Gas Fee, most view this as a better option than paying TDS every time they execute a trade.
International exchanges like Binance and KuCoin do perform know-your-customer (KYC) checks before allowing trading on their platforms. According to clarifications issued by the Central Board of Direct Taxes (CBDT) via Circular No. 13 on 22 June, exchanges have to levy the 1% TDS on transactions. It does not clarify whether this applies specifically to Indian exchanges.
However, more savvy investors aren’t apprehensive about this. For example, a 22-year-old engineering student from Bengaluru said that after transferring assets to Binance, he uses peer-to-peer (P2P) trading options to convert the crypto to e-commerce gift cards, thereby side-stepping the taxes altogether.
Binance and KuCoin didn’t respond to queries. However, in an interview with The Indian Express in July, KuCoin’s CEO, Johnny Lyu, said the platform had witnessed 5.6 million new users in the first half of 2022.
According to a spokesperson from Paxful, a P2P crypto exchange, the platform has nearly 500,000 users from India, and in 2022, over 25% of trades within India had gift cards exchanged for crypto.
A senior executive from one of the top exchanges in India said overnight traders, who made up a big part of India’s crypto community, have left after the taxes were imposed. The ones left are the “hodlers"—individuals who make long-term bets on cryptocurrencies and make large investments over time.
Further, tax lawyers and accountants are unclear about the regulations concerning declaring and moving such assets overseas. In 2018, the Reserve Bank of India (RBI), in response to a right to information (RTI) request, said no guidelines had been framed on virtual currencies under the Foreign Exchange Management Act (FEMA). “Virtual currency is not recognized as currency under Section 2(h) of FEMA, 1999. Hence, no guidelines have been framed on virtual currencies under FEMA," RBI said in the RTI response.
Anoush Bhasin, the founder of crypto tax advisory firm Quagmire Consulting, said exchanging crypto profits/income for gift cards isn’t inherently illegal, as long as individuals declare the income and pay taxes as required. However, using gift cards to avoid banking entries does not exempt users from tax liability. Non-disclosure in the tax returns could land users in trouble.
In circular No. 14 on 22 June, CBDT said buyers would have to deduct TDS in the case of P2P transactions. “In a peer-to-peer (i.e. buyer to the seller without going through an exchange) transaction, the buyer (i.e. person paying the consideration) is required to deduct tax under Section 194S of the Act. The tax so deducted is required to be deposited with the government in accordance with the time and procedure prescribed in the Act read with the relevant provisions of the Income-tax Rules, 1962," the circular said.
