How India’s High Taxes Killed its Crypto Liquidity: $3.8B in Outflows for 2022
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How India’s High Taxes Killed its Crypto Liquidity: $3.8B in Outflows for 2022

India's crypto ecosystem has been crippled under the country's controversial tax rules.
Neither the author, Ruholamin Haqshanas, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

India’s controversial crypto tax plans have adversely impacted trading volumes on local cryptocurrency exchanges. In fact, Indian crypto traders had moved more than $3.8 billion in trading volume to international crypto exchanges since February last year, when the nation announced a 30% tax on income from cryptocurrencies. 

India Imposed Stiff Crypto Tax Rules in 2022

India ranked fourth in crypto adoption in Chainalysis’ 2022 Global Crypto Adoption Index, leading the Southern Asia and Oceania regions in adoption. As per the report, the country recorded a whopping $172 billion in cryptocurrency transactions between July 2021 and June 2022.

There has also been an increasing interest in investing in India’s crypto and Web 3 sectors. Last year, major crypto exchange Coinbase announced plans to further expand its crypto hub in India by hiring more talent to capitalize on India’s “world class software talent,” CEO Brian Armstrong said in April 2022. 

However, the country’s growing crypto ecosystem took a hit following the controversial crypto tax rules. In February, India’s government unveiled its crypto tax plans, which included a proposal to tax gains from crypto transfers at a 30% rate. Moreover, any buyer of virtual digital assets will have to pay a 1% tax deduction at source (TDS). 

At the time, some experts warned that the levy of 1% TDS would hurt crypto liquidity in India as it would force high-frequency traders to dramatically reduce their trading in a bid to trim taxes. A recent report has provided the first monetary estimate of the impact of the tax laws on domestic exchanges.

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Indian Exchanges Struggle With Exodus of Liquidity

A research study by Esya Centre, a Delhi-based technology policy think tank, has revealed that Indian crypto traders have moved over $3.8 billion in trading volume from local exchanges to international crypto platforms after the country’s controversial tax policy came into effect.

“Of this, cumulative volume of $3,055 million was offshored within six months of the current financial year,” the report said. The report added that domestic exchanges lost 81% of their trading volumes in four months after the imposition of the much-debated 1% TDS rule.

Furthermore, “an estimated 17 lakh users switched” from domestic crypto exchanges to foreign counterparts over the past year. The report added:

“We anticipate a commensurately large negative impact on tax revenues, as well as a decrease in transaction traceability – which defeats the two central goals of the extant policy architecture. The current tax architecture may lead to a loss of approximately $1.2 trillion of local exchange trade volume in the next four years”

The Esya Centre report said India’s Virtual Digital Asset (VDA) industry is “crippled under the current tax architecture.” It claimed that all Indian crypto users would move to foreign exchanges under the current structure. 

As an alternative, the study suggested the Indian government change TDS from 1% per transaction to 0.1% and progressive taxes on gains instead of the flat 30% tax. 

India’s Central Bank has long maintained a harsh stance toward cryptocurrencies, claiming that the nascent asset class has no underlying value. As reported, the RBI asked the Indian Government to ban cryptocurrencies in the country last year, citing the “destabilizing” effect of this asset class on monetary stability.

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