India is home to one of the most active crypto trading communities in the world. Indians are at the forefront of new-gen innovation and are directly involved in building the entire blockchain space. However, the deterring policies of the Indian government towards cryptocurrencies are limiting the rate of blockchain adoption in the country.
Complimenting this claim, a recent study shows that the tax slabs on cryptocurrencies are one of the major reasons behind the mass movement of liquidity out of the economy. As per the reports, a sizeable sum out of the total crypto investments in the country has moved to international exchanges after the implementation of the new crypto tax regime.
In this CoinGabbar blog, we are going to dive deep into understanding the reasons behind this mass migration of assets to foreign exchanges. With this, we will also brainstorm about the possible solutions that can reduce this outflow.
Cryptocurrencies are 100% legal assets that are used to transfer value from the holder to the receiver. With this, all Virtual Digital Assets come under the Income Tax Act (1961) which makes them liable to be included in the tax slab of 30% on all the profits earned using virtual digital cryptocurrencies. Apart from that crypto users also have to pay 1 percent of the total transaction to the government in the form of Tax Deducted at Source (TDS).
In India, cryptocurrencies are not regulated to the extent of taxation but the government is using this tax bar to demotivate massive investments in cryptocurrencies. Initially, the Reserve Bank of India was in favor to ban cryptocurrencies in the nation but situations changed after a supreme court ruling that legitimized the trade of all virtual digital assets in the country.
These high tax rates are acting as a shadow ban for cryptocurrencies and limiting their adoption. Even though a majority of the crypto proponents are trying to raise their appeals for tax reduction on VDAs, the government has not expressed any official intention to
Last year, the cumulative trade volume of over $3,852 million shifted from domestic crypto exchanges to exchanges based out of India. Out of this just over $3000 million were moved offshore within the first six months of the implementation of the new tax regime.
This data has been taken from a report named Virtual Digital Asset Tax Architecture in India published by the Esya Centre, a New Delhi-based technology policy think tank.
The reports further reveal that 9,670 million dollars were traded in the country using peer-to-peer VDA trade and this does not include the independent movement of assets from one user to the other.
Last year when the Government of India decided to tax cryptocurrency profits, it was unforeseen that Indian investors would migrate this aggressively toward international crypto exchanges. The implementation of 1 percent TDS on each transaction worsened the situation further as the total trade volume fell by over 80% in a matter of four months.
“Current tax architecture may lead to a loss of approximately USD 1.2 trillion (INR 99.3 lakh crores) of local exchange trade volume in the next four years, relative to a pro-market scenario where (a) TDS on VDAs is at par with that on securities; (b) tax policy allows the provision to setoff losses; (c) taxation of gains from VDAs is internationally competitive.”
– Esya Center, New Delhi
The overall trade volume of cryptocurrencies is expected to increase manyfold in the coming years. And if the present tax regime continues, we would witness a huge outflow of the asset to foreign crypto exchanges. To avoid this from happening, these are some of the things that government can implement in the upcoming budget.
The reason given behind applying the TDS on crypto transactions was that it assists the government in tracking crypto transactions. The ideal situation to continue with this would be to reduce the TDS significantly which can curb the dissatisfaction of traders and reinvite them to trade on domestic exchanges.
The report suggests the government reconcile the tax rates vis-a-vis revenue maximization by ascertaining the optimal taxation point(s) through the Laffer-Curve analysis
The government should also realign the tax regime by fixating different tax rates for long-term and short-term positions in crypto markets. This alignment should be done with the international standard of taxes to avoid liquidity outflows from domestic exchanges.
This year, India is leading the G20 convention and there could be no better time for the government to call for a global consensus on cryptocurrencies. This will resolve many concerns of regulatory authorities and create a bridge for effective international collaboration.
Even though the severity of the tax regime might seem beneficial in the short term, this is becoming the reason for excessive outflows of liquidity from the economy. With this, India is not only missing out on the opportunity to lead the blockchain tech revolution but this is also pushing the startups to shift out of the country.
It is not healthy for a flourishing economy such as India to lose this much liquidity only because of a high tax bar on cryptocurrencies. It is high time that we evaluate our stances on these tax bars and work towards a global consensus.