Following the announcement of a 30 per cent tax on the income from crypto assets and one per cent tax deducted at source in the Budget 2022, cumulative trade volume worth Rs 32,000 crore shifted from Indian crypto exchanges to foreign ones between February to October, a study showed on Wednesday.

The current tax architecture may lead to a loss of approximately Rs 99.3 trillion of local exchange trade volume in the next four years, the “Virtual Digital Asset Tax Architecture in India” study released by Delhi-based think-tank The Esya Centre said.

“…it is important for the government to gather hard evidence on the optimal tax rate for the crypto market. This entails a balance between buoyant tax revenues and improvement in the overall contribution of the crypto ecosystem to the Indian economy,” Vikash Gautam, adjunct fellow at Esya Centre said.

Of Rs 32,000 crore, Rs 25,300 crore were offshored in the first six months of 2022-23 (FY23).

“60.8 per cent of the fall in the volumes of Indian centralised crypto exchanges are due to domestic market conditions or the tax architecture in India during Feb-Oct 2022, and the conditions intrinsic to these exchanges,” it added.

In February and March 2022, domestic centralised crypto exchanges lost 15 per cent of their total trading volumes. Between April and June, they lost another 14 per cent, and 81 per cent of all trading volume was lost between July and October. The 1 per cent TDS provision came into effect on July 1. From April 1, offsetting losses in crypto have also been disallowed.

According to AppTweak, in January 2022 Indian exchanges had 90 per cent market share for app downloads, now it is down to 48 per cent.

“We find that the main (unintended) impact of the policy is the offshoring of domestic business and liquidity to foreign exchanges. Therefore, 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 study said.

From February 2022, the study said there was “clear evidence” of foreign centralised crypto exchanges gaining traction at the cost of Indian centralised exchanges. “That is, there is robust evidence that many Indian investors switched (approximately 1.7 million) as a result of the domestic crypto tax architecture,” it said.

During July and September, downloads of domestic crypto exchange apps fell 16 per cent (year-on-year). On the other hand, downloads for foreign exchanges rose by a “commensurate” amount.

WazirX saw a 63 per cent trading volume decline a day after the imposition of TDS. They told Business Standard that till date, their volumes have been impacted by 90 per cent because of the tax impositions.

For the research, the think-tank used tax rate data on short-term and long-term gains, the applicability of TDS, and the provision to set off losses for deriving taxable income. And data from India was compared with countries with high crypto adoption rates along these three parameters. The countries were the US, UK, Canada, Ukraine, Brazil, Thailand, Japan, Austria, Singapore, Malaysia, South Africa, Netherlands, Switzerland, Vietnam and Philippines.

Apart from India, the crypto market saw a massive sell-off in 2022. The total market cap has fallen from over $2 trillion at the end of 2021 to $819 billion on Wednesday. Several exchanges, including FTX, have filed for bankruptcy. The price of Bitcoin, the largest crypto token by market cap, has fallen over 70 per cent since its peak in November 2021.

The study considered data from three Indian exchanges, WazirX, CoinDCX and Zebpay along with data from three foreign exchanges Binance, Coinbase and Kraken.

CoinDCX said that it has made a total payment of Rs 41.33 crore towards TDS under Section 194S as of November 2022 and supports the government's efforts for development of the sector. It has recommended the government to bring down TDS to 0.01 per cent.

“As an Indian start-up catering to Indian users, it is disheartening to see Indian policies inadvertently push Indians' business overseas, and leave Indian users vulnerable to foreign exchanges. Through our representation for the upcoming Union Budget, we have suggested that the rate of TDS be brought down to 0.01 per cent. We sincerely hope this request will be granted,” Sumit Gupta, co-Founder and CEO at CoinDCX told Business Standard.

“In the upcoming budget session, we hope that the government will repeal this tax so that investors are not discouraged from engaging with Indian exchanges,” said Rajagopal Menon, vice president at WazirX.

Following the announcement of a 30 per cent tax on the income from crypto assets and one per cent tax deducted at source in the Budget 2022, cumulative trade volume worth Rs 32,000 crore shifted from Indian crypto exchanges to foreign ones between February to October, a study showed on Wednesday.

The current tax architecture may lead to a loss of approximately Rs 99.3 trillion of local exchange trade volume in the next four years, the “Virtual Digital Asset Tax Architecture in India” study released by Delhi-based think-tank The Esya Centre said.

“…it is important for the government to gather hard evidence on the optimal tax rate for the crypto market. This entails a balance between buoyant tax revenues and improvement in the overall contribution of the crypto ecosystem to the Indian economy,” Vikash Gautam, adjunct fellow at Esya Centre said.

Of Rs 32,000 crore, Rs 25,300 crore were offshored in the first six months of 2022-23 (FY23).

“60.8 per cent of the fall in the volumes of Indian centralised crypto exchanges are due to domestic market conditions or the tax architecture in India during Feb-Oct 2022, and the conditions intrinsic to these exchanges,” it added.

In February and March 2022, domestic centralised crypto exchanges lost 15 per cent of their total trading volumes. Between April and June, they lost another 14 per cent, and 81 per cent of all trading volume was lost between July and October. The 1 per cent TDS provision came into effect on July 1. From April 1, offsetting losses in crypto have also been disallowed.

According to AppTweak, in January 2022 Indian exchanges had 90 per cent market share for app downloads, now it is down to 48 per cent.

“We find that the main (unintended) impact of the policy is the offshoring of domestic business and liquidity to foreign exchanges. Therefore, 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 study said.

From February 2022, the study said there was “clear evidence” of foreign centralised crypto exchanges gaining traction at the cost of Indian centralised exchanges. “That is, there is robust evidence that many Indian investors switched (approximately 1.7 million) as a result of the domestic crypto tax architecture,” it said.

During July and September, downloads of domestic crypto exchange apps fell 16 per cent (year-on-year). On the other hand, downloads for foreign exchanges rose by a “commensurate” amount.

WazirX saw a 63 per cent trading volume decline a day after the imposition of TDS. They told Business Standard that till date, their volumes have been impacted by 90 per cent because of the tax impositions.

For the research, the think-tank used tax rate data on short-term and long-term gains, the applicability of TDS, and the provision to set off losses for deriving taxable income. And data from India was compared with countries with high crypto adoption rates along these three parameters. The countries were the US, UK, Canada, Ukraine, Brazil, Thailand, Japan, Austria, Singapore, Malaysia, South Africa, Netherlands, Switzerland, Vietnam and Philippines.

Apart from India, the crypto market saw a massive sell-off in 2022. The total market cap has fallen from over $2 trillion at the end of 2021 to $819 billion on Wednesday. Several exchanges, including FTX, have filed for bankruptcy. The price of Bitcoin, the largest crypto token by market cap, has fallen over 70 per cent since its peak in November 2021.

The study considered data from three Indian exchanges, WazirX, CoinDCX and Zebpay along with data from three foreign exchanges Binance, Coinbase and Kraken.

CoinDCX said that it has made a total payment of Rs 41.33 crore towards TDS under Section 194S as of November 2022 and supports the government's efforts for development of the sector. It has recommended the government to bring down TDS to 0.01 per cent.

“As an Indian start-up catering to Indian users, it is disheartening to see Indian policies inadvertently push Indians' business overseas, and leave Indian users vulnerable to foreign exchanges. Through our representation for the upcoming Union Budget, we have suggested that the rate of TDS be brought down to 0.01 per cent. We sincerely hope this request will be granted,” Sumit Gupta, co-Founder and CEO at CoinDCX told Business Standard.

“In the upcoming budget session, we hope that the government will repeal this tax so that investors are not discouraged from engaging with Indian exchanges,” said Rajagopal Menon, vice president at WazirX.