According to a new report, India’s crypto tax regulations, which went into effect last April, have caused local exchanges to cede the lion’s share of the market to those operated by foreign players.
According to New Delhi-based think tank Esya, Binance, Coinbase and other overseas exchanges held 67.6% of the crypto market share in India as of October 2022, up from 50% in November 2021.
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 those operated offshore, the report said (PDF ).
Indian exchanges like WazirX, CoinSwitch and CoinDCX lost a whopping 81% of their trading volume in four months between July and October, Esya said, attributing the trend to local TDS rules.
India is among the nations that have taken a strict approach to cryptocurrencies. It began taxing virtual currencies in April last year, imposing a 30% tax on profits and a 1% deduction on each crypto transaction.
The report argues that traders are switching 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 that allows users to avoid transacting with a company.
Additionally, many overseas 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 Indian stock exchange executives have warned that India’s tax regime will force users to switch to unregulated companies.
“This implies that India is not only losing international competitiveness in the VDA (Virtual Digital Asset) ecosystem, which is closely linked to several emerging technologies, but also scarce liquidity, which is important for simultaneous economic value creation in the country,” Esja wrote.
“It is important that the effects of the current VDA architecture on the state’s tax revenues are also unclear.”
The report urges the Indian government to reassess its crypto taxation and suggests that it at least waive the 1% TDS levy on transactions.
The vast majority of local authorities remain among the most vocal opponents of crypto. The governor of India’s central bank warned last month that unless their use is banned, private cryptocurrencies will cause the next financial crisis.
The central bank said last week that under its current G20 presidency, India is prioritizing the development of a framework for global regulation of unsecured crypto assets, stablecoins and decentralized finance, and the “possibility of [their] Ban” in a potentially major setback for the burgeoning industry.