Esya Centre, a technology policy think tank, has unveiled a report. From what it’s understood, the report showed that the imposition of a one percent tax-deducted-at-source (TDS) on the trading of virtual digital assets (VDA) in India has made three to five million users shift to offshore trading platforms.
According to an official release, the report, titled “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market,” found that the one percent TDS on VDA trade move deprived the exchequer of Rs 3,493 crores revenues, as against the collected revenue of Rs 258 crores. It’s believed that India’s digital economy lost opportunities to the tune of four to five times of this value from externalities. Out of the Rs 258 crores collected, Rs 250 crore seemingly was paid by domestic Indian VDA exchanges, or 97% of the total amount. On the other hand, seven crore rupees was reportedly collected from trades by Indians on offshore platforms, that’s 0.2% of the Rs 3500 crore that should have been collected.
Sources suggest that the Esya Centre report used data from Indian and global VDA ecosystems, analysed transaction volumes from 13,000 peer-to-peer (P2P) traders and conducted a survey of executives working at India’s leading VDA exchanges to assess the impact of the one percent TDS levy. The study revealed four insights. First, it found that three to five million Indian users have shifted to offshore platforms since the TDS was announced in February, 2022, with a single offshore exchange reporting 450,000 signups in the month following its implementation in July, 2022. Reportedly, web traffic, active users, and downloads by Indians on offshore platforms have increased since July, 2022, in tandem with a decline on Indian VDA exchanges in the same period. Second, an analysis of data on weekly active users, downloads and web traffic showed that the TDS provision and the lack of government respite from this penal tax regime have had the greatest impact on users, who want the levy to be suspended. Seemingly, the impact was in the range of 44% to 74% on these parameters. Third, the report suggested that over Rs 3,50,000 crores worth of VDAs were traded by Indians on offshore platforms between July, 2022, and July, 2023, accounting for more than 90 percent of the total VDA trade volume by them. Finally, a survey of executives at seven Indian VDA exchanges found that the TDS is the most important reason for high offshore P2P trading. Lowering the TDS to 0.01% should be the most important corrective measure to motivate traders to trade on domestic exchanges, as per the report.
Based on these findings, the Esya Centre study proposed policy measures for the government, namely clarification on the applicability of TDS to offshore platforms, lowering the TDS to 0.01 percent or implementing an alternative reporting mechanism, such as the submission of an Annual Information Report (AIR) to fulfil the purpose of data collection, standardisation of activities such as due diligence for token licensing and listing, as well as reporting and information sharing, and authorising a government authority to blacklist and block offshore exchanges that are outside the tax net.
“I think the VDA tax architecture in India is a lost opportunity in terms of revenues for the exchequer and localisation of the VDA industry. Data shows that two likely policy objectives of the tax — to curb speculation and create transparency around transactions — have not been achieved. There seems to be a need to reduce the TDS in particular to fix this to the benefit of the Indian economy and VDA investors / consumers,” Vikash Gautam, author of the report and an adjunct fellow, Esya Centre, said.