India’s Crypto Tax Policies May Result in $2 Billion Revenue Loss

India’s current tax policies on cryptocurrency transactions may lead to a significant loss in tax revenue, with estimates suggesting over $2 billion in lost revenue over the next five years. A recent report from Indian technology think tank Esya Centre highlights the consequences of the country’s tax policies, which have driven traders to offshore platforms.

Losses Due to Tax Policies

The Indian government has already missed out on collecting over INR 6,000 crore (approximately $724 million) in tax revenue from virtual digital assets since July 2022. This is due to traders migrating to offshore exchanges to avoid compliance burdens and high tax rates. In addition, the government has levied a 30% capital gains tax on cryptocurrency transactions, which does not allow users to offset losses against gains.

Domestic crypto trades are also subject to a 1% Tax Deducted at Source (TDS). However, these measures have been largely ineffective, as traders continue to bypass restrictions using VPNs, and offshore platforms still dominate trading volumes.

Offshore Trading Volumes

Between July 2022 and November 2023, Indian users traded over INR 1.03 lakh crore (approximately $12.3 billion) worth of virtual digital assets on offshore platforms, including blocked exchanges. The cumulative uncollected TDS estimated during this period exceeded INR 3,493 crore (around $417 million).

Furthermore, between December 2023 and October 2024, trading volumes on offshore platforms surged further, reaching INR 2.63 lakh crore (about $31.1 billion). This corresponds to an estimated INR 2,634 crore (approximately $311 million) in TDS owed by offshore platforms, bringing the total uncollected TDS since July 2022 to over INR 6,000 crore.

Domestic Exchanges and TDS Compliance

While domestic exchanges showed some improvement in early 2024, the overall trend indicated that locals continued to migrate to offshore platforms. Currently, KUcoin is the only Financial Intelligence Unit registered foreign exchange that began deducting TDS in March 2024 through a local entity. However, its contribution to overall offshore trading volumes by Indian users remains below 5%.

Revising Tax Policy

The report warned that uncollected TDS from offshore crypto trading could surpass ₹17,700 crore (approximately $2.1 billion) over the next five years if the current trend persists. To address these challenges, the report recommended revising Section 194S of the Income Tax Act to make offshore platforms responsible for TDS deductions, even if they’re not physically based in India, while also lowering the 1% TDS rate to 0.01%.

“The current regulatory framework disproportionately affects compliant users and entities while failing to address the root causes of non-compliance.”

Industry Recommendations

Industry stakeholders have repeatedly pushed for a lower TDS rate and the ability to offset losses, arguing these changes could revitalize domestic trading. However, regulators remain largely silent on the issue, with much of the nation’s focus diverted toward developing its central bank digital currency.

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