Manoj Kumar Sharma
Indian policymakers have not shied away from expressing their concerns around crypto-assets. They have, on more than one occasion, noted their hesitance to regulate and legitimise crypto-assets. At the same time, they also understand that a complete ban on crypto is unrealistic. As a middle ground, Indian policymakers have opted to impose heavy taxes on crypto transactions such as a flat 30 per cent capital-gains tax and 1 per cent tax deducted at source. However, both these measures have proved to be counter-productive. These measures have not only failed to discourage crypto transactions, but have encouraged Indian users to transact on offshore platforms. Unfortunately, these platforms are not only out-of-sight but also out of the reach of domestic laws and regulations.
While there is a strong consensus among all stakeholders that irresponsible use of crypto must be restricted, there is divergence in the measures to this end. The imposition of heavy-handed measures such as high taxes has proved to be ineffective. Since the taxes became operational, trading volumes on Indian crypto exchanges plummeted by over 70 per cent. On the other hand, offshore exchanges witnessed corresponding spikes in trading activity on their platforms. Studies have shown that between 2022 and 2024, over Rs. 6,000 crore potential taxable income moved offshore. This number could go up by three times in the next five years if the status quo is maintained.
This underscores the fact that high taxes and cost of compliance do not discourage the underlying activity, instead they incentivise the activity to migrate. Technically, India’s active crypto users are not outside the tax net because they are invisible, they are outside because the taxation policy incentivised them to move offshore. By pushing trading activity offshore, the taxation policy has failed to dissuade retail speculation, weakened consumer protection, eroded regulatory supervision and reduced government revenue. As a result, policymakers, albeit unintentionally, punish domestic compliant exchanges and rewarding exchanges that remain outside their reach.
Yet, many critics of taxation reforms on crypto-assets argue that lower taxes would encourage crypto activity and invite reckless speculation. However, the opposite is more likely, as evidence from economic theory shows that moderate and appropriately designed tax structures tend to increase compliance and transparency.
A tiered and lower-rate tax structure would bring back crypto activity on-shore to exchanges that are monitored and regulated. Additionally, it would continue to deter users (tax on gains remains) and, more importantly, improve government review by expanding the taxable base and lowering chances of evasion.
In effect, the tax rate should be lower and not absent. A recent white paper comparing crypto tax regimes across the world found that most countries such as Thailand, Brazil, Japan and South Korea tax crypto under existing taxation frameworks for traditional financial assets, rather than levying a flat, crypto-specific rate as India does. Typically, countries have implemented progressive income-tax or capital gains slabs for crypto-transactions similar to how they treat financial and other moveable assets.
It should be noted that reducing capital gains tax should not be viewed as being soft on crypto. Instead, it must be seen as a clever measure to ensure compliance and enhance government revenue. A rethink of the 30 per cent tax is not a retreat, it is a reform that would, in turn, strengthen the very outcomes the government seeks.
(The author is a senior journalist and member of Press Club of India; views expressed are personal)
