A New Delhi-based think-tank has revealed some interesting facts regarding the impact of crypto tax rules on virtual digital assets that triggered a massive capital outflow to foreign shores.
Around Rs 32,000 crore worth of crypto trade volume has been shifted to foreign shores from the Indian crypto exchanges between February and October 2022 following changes in tax legislation, New Delhi-based technology think-tank, Esya Centre, said in a report.
The report titled “Virtual Digital Asset Tax Architecture in India: A Critical Examination”, published in collaboration with Taxsutra, a B2B online tax portal, studies the impact of India’s tax rules on cryptos.
The study found that of the total volume, more than Rs 25,000 crores were offshored within six months of the current fiscal year. Additionally, the total trade volume contributed by Indians on foreign centralised VDA exchanges was around Rs 80,000 crore between July and October 2022.
It noted that the implementation of one percent TDS (tax deducted at source) had the worst impact out of the three tax measures announced by the government, as Indian VDA exchanges lost up to 81 per cent of their trading volume in three and a half months between July 1 and October 15.
“Many Indian VDA users seem to be switching from domestic centralised VDA exchanges to foreign counterparts (approximately 17 lakh users switched in the period analysed), a trend visible starting Feb 2022 (following the Union Budget announcement),” the study said.
“The downside impact of the VDA tax architecture is likely to accentuate capital outflow further and deter international investors. This implies reduced competitiveness of Indian centralised VDA exchanges relative to international counterparts,” the report added.
The think tank said that international exchanges, like Binance and Coinbase, controlled over 67 per cent of the cryptocurrency market share in India as of October 2022, up from 50 per cent in November 2021.
Between February 2022, when India published its crypto tax policy, and October 2022, a total of $3.8 billion in trade activity were transferred from domestic to foreign exchanges.
In the four months between July and October, Indian exchanges like WazirX, CoinSwitch, and CoinDCX lost a staggering 81 per cent of their trading volume, according to Esya.
“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, important for concurrent economic value creation in the country,” Esya said.