New Delhi: The central government lost nearly Rs 3,500 crore in potential tax revenues from crypto transactions from 1 July, 2022, to 2 October 2023, according to a new report by Esya Centre, a not-for-profit policy think tank. This amount could rise to Rs 10,000 crore in the next two years, it further said.
The report, which was published Thursday, attributed this loss to the government’s 2022 decision to impose a 1 percent tax deducted at source (TDS) on transactions of virtual digital assets (VDA), which pushed millions of users to shift to using offshore platforms for their cryptocurrency transactions.
The 1 percent TDS on VDA transfers was introduced in July 2022, along with a 30 percent capital gains tax on the profits earned from trades from 1 April, 2022.
“We estimate that Rs 3,493 crore in TDS on VDA transactions went uncollected, representing a lost opportunity for the treasury that is 13.6 times the pool of TDS collected,” said the report. According to government data, approximately Rs 257.6 crore was collected as TDS between 1 July, 2022, and 1 October, 2023, the report added.
It analysed the impact of the government’s July 2022 decision on trading in crypto assets (referred to as virtual digital assets in the Income-tax Act, 1961). According to the report, while the move seems intended to discourage speculative activity and increase traceability in the VDA ecosystem, its analysis suggested that these goals remain unmet.
It recommended that the government needed to clarify the applicability of TDS to offshore platforms. It further suggested lowering the TDS to 0.01 percent or implementing an alternative reporting mechanism, such as the submission of an annual information report, to fulfill the purpose of data collection.
“Together with obligations of the Prevention of Money Laundering Act, 2002, this will give regulators sufficient insight into fund flows in the Indian VDA ecosystem,” it added.
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The offshore exodus
The report said that the 1 percent TDS has led Indian users to trade on offshore VDA exchange platforms and other untraceable channels. It found that as many as 3-5 million (30-50 lakh) Indian users had moved to offshore platforms since the TDS was announced in the Budget in February 2022.
This resulted in lost revenue for the exchequer and lost opportunities in the form of forgone positive externalities for the digital economy in India, it added.
“Analysis of VDA user activity and reach suggests millions of Indian users have shifted to offshore platforms since the TDS was levied, with a single offshore exchange reporting it received over 4,50,000 signups in the month following its introduction,” the report said.
“Web traffic, active users, and downloads by Indians on offshore platforms have increased secularly since July 2022, in tandem with a secular decline on Indian VDA exchanges in the same period,” it added.
It also found that over Rs 3.5 lakh crore 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 Indians.
This would have increased by Rs 3,500 crore in TDS if it had been traded through the legalised domestic route, it added.
“If the global VDA market regains the size and volume of 2021 and early 2022 (roughly twice the size it is now), we expect this number to balloon to over Rs 10,000 crore in the next two years,” the report added.
“However, according to government reports, only a sum of Rs 258 crore was collected in TDS in this period. This represents a loss of about 93 percent to the exchequer, compared with a scenario in which all P2P (peer-to-peer) trades were TDS compliant,” it said.
(Edited by Richa Mishra)
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