A cumulative trade volume of over ₹32,000 crore was shifted from domestic centralised exchanges to foreign shores between February and October 2022 after the announcement of new tax regime in India, according to a study by Esya Centre.
The study by the New Delhi-based technology policy think tank showed that out of the ₹32,000 core, ₹25,300 crores was offshored within the first six months of the current financial year.
Meanwhile, the total trade volume contributed by Indians on foreign centralised virtual digital asset (VDA) exchanges was to the tune of ₹80,000 crores between July and October 2022.
The study pointed out that many Indian VDA users seem to be switching from domestic centralised VDA exchanges to foreign counterparts with approximately 17 lakh users switched since the announcement of the tax regime in the Union Budget in February 2022.
“This is likely to lead to a 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 downside impact of the VDA tax architecture is likely to further accentuate capital outflow and deter international investors. This implies reduced competitiveness of Indian centralised VDA exchanges relative to international counterparts,” the study added.
Implementation of one per cent TDS had the most distortionary impact out of the three tax measures/events, as Indian VDA exchanges lost up to 81 per cent of their trading volumes in three and a half months between July 01 and October 15, following the levy, according to the study.
The Esya Centre recommended three steps to stem the offshoring of domestic business and liquidity to foreign exchanges.
It says tax deducted at-source (TDS) on VDAs should be at par with securities transaction tax. The government should reconcile tax rates vis-a-vis revenue maximisation by ascertaining the optimal taxation point(s) using economic analysis tools such as the Laffer Curve. And, India should adopt a progressive tax structure with differentiated rates for short-term and long-term gains, in line with international best-practices, it added.