India’s tax policies on cryptocurrency are pushing traders to offshore platforms, risking a loss of over $2 billion in tax revenue over the next five years, a new report from Indian think tank Esya Centre reveals. Since July 2022, the government has already missed collecting over ₹6,000 crore ($724 million) in taxes from virtual digital assets (VDAs), a trend that shows no signs of slowing.

Heavy Taxes Drive Migration to Offshore Platforms

India’s stringent crypto tax regime includes a 30% capital gains tax on transactions and a 1% Tax Deducted at Source (TDS) on domestic trades. The inability to offset losses further adds to the burden, prompting traders to shift to offshore exchanges.

Between July 2022 and November 2023, Indian users traded over ₹1.03 lakh crore ($12.3 billion) worth of VDAs on offshore platforms. From December 2023 to October 2024, trading volumes on offshore platforms surged to ₹2.63 lakh crore ($31.1 billion), resulting in an estimated ₹6,000 crore ($724 million) in uncollected TDS since 2022.

Regulations Struggle to Curb Tax Evasion

Efforts to tighten oversight have had limited impact. India brought VDAs under the Prevention of Money Laundering Act (PMLA) and blocked URLs of non-compliant offshore platforms. Yet, traders bypass these restrictions using VPNs, and offshore platforms continue to dominate trading volumes.

Only one foreign exchange, KUcoin, began TDS deductions via a local entity in March 2024. However, its share of Indian offshore trading volumes remains under 5%, underscoring the ineffectiveness of existing measures.

Indian exchanges have seen a sharp drop in user activity, with web traffic plummeting by 34% in 2024. Despite some early improvements, domestic platforms struggle to compete with offshore exchanges, which offer lower costs and fewer compliance burdens.

Call for Revised Tax Policies

The report urges a reduction in the 1% TDS rate to 0.01% and amendments to Section 194S of the Income Tax Act to make offshore platforms liable for TDS deductions, even without local operations. Industry stakeholders argue these changes could revitalise domestic trading while ensuring compliance.

Without reform, uncollected TDS from offshore crypto trading could exceed ₹17,700 crore ($2.1 billion) by 2028, risking further revenue losses and weakening India’s position in the global crypto economy.

Adopting balanced policies could help retain traders, boost tax compliance, and foster a thriving domestic crypto ecosystem, stakeholders assert. However, government action remains awaited as traders continue to flock offshore.