India’s crypto tax rules, which came into effect last April, have caused local exchanges to concede the lion’s share of the market to foreign players, according to a new report.
Binance, Coinbase and other foreign exchanges held 67.6% of crypto market share in India as of October 2022, up from 50% in November 2021, according to New Delhi-based think tank Esya.
In the period between February 2022, when India unveiled its crypto tax policy, and October 2022, $3.8 billion in trading volume shifted from domestic centralized exchanges to offshore exchanges, the report states. said (PDF).
Indian exchanges including WazirX, CoinSwitch and CoinDCX lost as much as 81% of their trading volume in four months between July and October, said Esya, who attributed the trend to local TDS rules.
India is one of the countries that have taken a strict approach to cryptocurrencies. It started taxing virtual currencies last April, with a 30% tax on profits and a 1% deduction on every crypto transaction.
The report argues that traders move to foreign exchanges because they believe they can hide their activities from local authorities. Many of the foreign exchanges, including Binance, offer a peer-to-peer on-ramp and off-ramp capability, eliminating the need for users to trade with a company.
In addition, many foreign exchanges, including KuCoin and Gate, allow crypto trading within a certain capital limit (usually a few thousand dollars per day) without KYC details. Decentralized exchanges like DYDX do not require KYC by design. In the past, top executives of Indian exchanges have warned that the Indian tax regime will force users to switch to unregulated entities.
“These imply that India is not only losing international competitiveness in the VDA (virtual digital asset) ecosystem, which is closely linked to various emerging technologies, but also the scarce liquidity that is important for simultaneous economic value creation in the country,” Esja wrote .
“Importantly, the implications of the current VDA architecture on government tax revenue are also unclear.”
The report urges the Indian government to re-evaluate its crypto tax, suggesting that it at least waives the 1% TDS levy on transactions.
The vast majority of local authorities remain among the most outspoken opponents of crypto. The governor of India’s central bank warned last month that private cryptocurrencies will cause the next financial crisis unless their use is banned.
The central bank said last week that India, under its continued G20 presidency, will prioritize the development of a framework for global regulation of unsupported crypto-assets, stablecoins and decentralized finance and the “possibility of [their] ban.”