At the same time, the country did not grant provisions to offset crypto losses against other income. To trace the transfer of digital assets, India also levied a 1% tax deductible at source (TDS) on the transfer of crypto assets from July 1, 2022.

High Taxes Discourage Indian Crypto Traders

According to a recent report by the Indian technology think tank Esya Centre, since the announcement of these tax structures, local crypto exchanges have collectively lost billions of dollars in their trading volumes.

The report titled “Virtual Digital Asset Tax Architecture in India” shows that between February and October 2022, cumulative trade volume worth $3.852 billion has been transferred from Indian centralised exchanges (CEXs) to foreign exchanges.

The trading volume of local exchanges dropped from around $4.73 billion in January to $137.6 million by October 2022, as per the study.

The report stated that the 1% TDS, which became effective in July, has the most “distortionary impact” on these exchanges. Between July and October, Indian crypto exchanges lost around 81% of their trading volumes.

The report added that local crypto exchanges lost 97.1% of their volumes between January and October last year, while foreign exchanges lost just 36.3% simultaneously.

As per the report, downloads for local crypto exchange applications declined by 16% between July and September while increasing by the same level for foreign exchanges.

“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 report stated.

Exchanges May Lose $1.2T in Trading Volume by 2026

The researchers predicted that India’s current tax structure may cause losses of approximately $1.2 trillion in local exchange trade volume by 2026.

“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,” the report said.

(By William A. Frederick)