India’s cryptocurrency exchanges have lost a major share of their trading volumes to foreign platforms since February 2022.
Between February and October 2022, Indian exchanges ceded $3.8 billion in trade to foreign ones, said a report (pdf) by New Delhi-based think tank Esya. By October 2022, global players like Binance and Coinbase held 67.6% of the volumes in India, up from 50% in November 2021.
This shift was caused by India’s stringent policy stance, along with prevailing global market conditions.
“If investors channel their activities offshore, the Indian VDA (virtual digital asset) tax design is counterproductive,” the Esya report said.
India’s cryptocurrency market gained traction during the pandemic years, with its total holdings reaching more than $5 billion by February 2022. But it began shrinking after the Union budget of 2022 announced a 30% tax on gains from trading, along with a 1% tax deduction at source (TDS). The budget did not make provisions to write off losses.
These policy measures only aggravated the conditions for Indian exchanges created by global headwinds.
The collapse of international cryptocurrency platforms like FTX and Vauld hit global trading volumes, but Indian exchanges like WazirX, CoinSwitch, and CoinDCX suffered the worst.
“Indian VDA exchanges lost 97.1% of their volume in October 2022 when compared to the corresponding volumes in January 2022. In this period, foreign exchanges lost only 36.3%,” the Esya report said.
It is easier to convert cryptocurrencies to fiat currency on International exchanges like Binance. This allows traders to route funds without intermediaries.
These incentives, besides the easier taxation abroad, are what lure Indian traders to foreign platforms.
“These imply that India is not only losing out on international competitiveness in the VDA ecosystem, which is closely linked to several emerging technologies, but also on scarce liquidity which is important for concurrent economic value creation in the country,” the Esya report said.
The Indian government, therefore, needs to reassess its taxation policy to incentivize users, it said. Experts believe a regulatory framework at par with global policies is what is needed to sustain the industry in India.
India has adopted a strict policy on taxing cryptocurrency holdings. In December 2022, Reserve Bank of India governor Shaktikanta Das even voiced his concerns about financial stability if cryptocurrency usage is not banned.
In comparison, other global jurisdictions have been more lenient.
For instance, the US, the world’s biggest cryptocurrency market, classifies these assets as property. It levies up to 20% tax on long-term capital gains and also provides against losses. It does not levy TDS.
The UK has a somewhat similar policy.
In Singapore, profits generated from cryptocurrencies are simply tax-free. The government there views cryptocurrencies as intangible property.
In this context, India’s “flat high tax rate may not be optimal to maximize tax revenues from the industry as it indirectly prompts investors to evade tax through increased peer-to-peer (P2P) and grey market trading,” the Esya report said. This, it said, could hamper financial stability.