India’s crypto tax could cause CEXs to lose $1.2T trading volume by 2026

According to recent data, Indian crypto exchanges lost about 97.1% of their trading volume between January and October 2022. research.

A report by the Esya Center, an Indian technology policy think tank, examined three major Indian exchanges, including WazirX, CoinDCX and Zebpay. This study is significant as it provides the first financial estimates of the impact of India’s cryptocurrency tax.

Trading volume on Indian exchanges surged to $137.6 million by October 2022, from around $4.73 billion in January, according to a research study.

About $3.85 billion in trading volume fled from Indian exchanges to foreign exchanges between February and October, a study found. The study included trading volumes for his three international exchanges: Binance, Coinbase and Kraken.

Much of the decline in trading volumes on India’s Centralized Exchanges (CEX) came after India announced a hefty 30% tax on all cryptocurrency transactions on February 1, 2022. This tax he took effect on April 1st.

In the period between the tax announcement and its implementation, trading volumes on Indian exchanges fell by 15%, the study notes. A further 14% reduction in volume.

About $3.05 billion in trading volume — 80% of the $3.5 billion lost in foreign exchange — moved to international CEX between April and October, the study found.

Most of the volume loss occurred after the government imposed a 1% withholding tax (TDS) from July 1st. His trading volume fell to $988 million from his $1.22 billion in July.

A tax of 1% was implemented on all transactions exceeding INR 10,000 (approximately $120) in the financial year. The announcement of the tax and its subsequent implementation created confusion. Crypto exchanges fumbled to find a way to introduce a 1% tax in the absence of clear guidelines.

Many Indians have denounced the high tax rate of 30% and most have moved to foreign cryptocurrency exchanges to avoid the 1% tax. The study estimates that around 1.7 million Indian users have switched to forex since February.

A survey of 9,500 actively traded respondents conducted by WazirX and Zebpay between 1 January and 15 April 2022 found that 24% of Indian investors were open to foreign exchange. He said he was considering moving. Additionally, the study found that taxes affect the trading frequency of 83% of Indian traders.

A study by the Esya Center, which surveyed a sample of 5,436 peer-to-peer (P2P) traders and industry estimates, found that between July and October, Indians contributed about $9.67 billion in P2P trading volume in forex. I know I contributed.

Additionally, from July to September, Indian exchanges saw a 16% month-on-month decline in cryptocurrency adoption as measured by mobile app downloads. Over the same period, his CEX app downloads abroad increased by 16% over the corresponding month.

Impact of India’s virtual currency tax

The above data suggests that India’s crypto tax regime has caused liquidity and trading volume from domestic exchanges to fly offshore. The study notes that the main reason for this capital outflow is the current tax system, which is discouraging Indian crypto investors, especially smaller traders.

This makes the current cryptocurrency tax regime “counterproductive” to its goals, the study said, adding:

“…we foresee a commensurately large negative impact on tax revenues and a reduction in transaction traceability, which defeats two central goals of the existing policy architecture.”

The study adds that reduced trade traceability could have a negative impact on financial stability.

Additionally, regulatory uncertainty in the cryptocurrency market could reduce the ability of domestic exchanges to raise funds compared to foreign exchanges, the report notes.

Furthermore, the study estimates that if the tax regime remains unchanged, Indian investors will continue to use foreign exchange and domestic CEX trading volumes will decline. This could ultimately make Indian exchanges ‘non-viable’.

Assuming the tax amount remains unchanged, the study estimates that the cumulative trading volume loss for India’s CEX will reach $1.2 trillion over the next four years.

To avoid this, the study will reduce the TDS rate to parity with securities, allow Indian investors to offset cryptocurrency losses, and reduce the tax regime progressively compared to the current “regression” model. suggested to do

Relying on differentiated tax rates for short- and long-term gains could increase tax collection and possibly curb capital outflows.

If the government adopts these changes, the study estimates that trading volumes on India’s centralized exchanges will return to pre-tax announced levels within two quarters. In addition, domestic exchanges will receive an average of 50.5% traction from Indian users, returning to pre-tax normalcy.

Finally, the study notes that the high volume of peer-to-peer trading demonstrates the need for regulatory oversight and specific licensing regimes for exchanges. The report also suggests that the Indian government will step up international cooperation and learn from international best practices on platforms such as the G20.