ASIA: India risks losing $2b in tax revenue as crypto traders shift to offshore platforms

India could lose over $2 billion in tax revenue from cryptocurrency transactions over the next five years due to its tax policies driving traders to offshore platforms, according to a recent report.

The December report from Indian technology think tank Esya Centre reveals that the government has already missed out on collecting over INR 6,000 (roughly $724 million) crore in tax revenue from virtual digital assets since July 2022 as traders migrated to offshore exchanges to avoid compliance burdens and high tax rates.

After overturning a 2018 shadow ban, India levied a 30% capital gains tax on cryptocurrency transactions, which does not allow users to offset losses against gains, while also subjecting domestic crypto trades to a 1% Tax Deducted at Source.

Additionally, the government has attempted to regulate the sector by bringing VDAs under the Prevention of Money Laundering Act (PMLA) and blocking URLs of non-compliant offshore exchanges to curb tax evasion and improve oversight.

However, the report highlights that these measures have been largely ineffective, as traders continue to bypass restrictions using VPNs, and offshore platforms still dominate trading volumes.

Notably, between July 2022 and November 2023, Indian users traded over INR 1.03 lakh crore (approximately $12.3 billion) worth of VDAs on offshore platforms, including blocked exchanges, with cumulative uncollected TDS estimated to exceed INR 3,493 crore (around $417 million) during this period.

Between December 2023 and October 2024, trading volumes on offshore platforms surged further, INR 2.63 lakh crore (about $31.1 billion). This corresponds to an estimated INR 2,634 crore (approximately $311 million) in TDS owed by offshore platforms, bringing the total uncollected TDS since July 2022 to over INR 6,000 crore, the report stated.

On the other hand, while domestic exchanges showed some improvement in early 2024, the overall trend indicated that locals continued to migrate to offshore platforms, with web traffic data indicating a 34% drop in user activity on major domestic platforms since the start of the year.

Currently, KUcoin is the only Financial Intelligence Unit registered foreign exchange that began deducting TDS in March 2024 through a local entity. However, its contribution to overall offshore trading volumes by Indian users remains below 5%.

If the current trend persists, the report warned that uncollected TDS from offshore crypto trading could surpass ₹17,700 crore (approximately $2.1 billion) over the next five years.

India must revise tax policy
“The current regulatory framework disproportionately affects compliant users and entities while failing to address the root causes of non-compliance,” the report added, pointing out that registering with the FIU does not mandate offshore exchanges to set up local subsidiaries or ensure tax compliance.

To address these challenges, the report recommended revising Section 194S of the Income Tax Act to make offshore platforms responsible for TDS deductions, even if they’re not physically based in India, while also lowering the 1% TDS rate to 0.01%.

Industry stakeholders have repeatedly pushed for a lower TDS rate and the ability to offset losses, arguing these changes could revitalize domestic trading. Yet, regulators remain largely silent on the issue, with much of the nation’s focus diverted toward developing its central bank digital currency.