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

The report by Indian technology policy think tank Esya Centre studied three major Indian exchanges, including WazirX, CoinDCX, and Zebpay. The study bears significance since it provides the first monetary estimate of the impact of India’s crypto tax.

From around $4.73 billion in January, trading volume on Indian exchanges tanked to $137.6 million by October 2022, as per the research study.

Between February and October, around $3.85 billion in trading volume fled from Indian exchanges to foreign counterparts, the study revealed. The research included trading volumes from three international exchanges — Binance, Coinbase, and Kraken.

Much of the drop in trading volumes of India’s centralized exchanges (CEXs) came after India announced a steep 30% tax on all crypto transactions on February 1, 2022. The tax came into effect on April 1.

In the period between the tax announcement and its implementation, trading volumes on Indian exchanges dropped 15%, the study noted. After the tax was implemented, Indian CEXs lost another 14% in trading volume between April and June.

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

The majority of trading volume loss occurred after the government levied a 1% tax deducted at source (TDS) from July 1. Following the TDS implementation, Indian exchanges lost 81% of their trading volume in 4 months, the study noted. From $1.22 billion in July, the trading volume fell to $988 million.

The 1% tax was implemented on all transactions exceeding INR 10,000 (around $120) in a financial year. The tax announcement and its subsequent implementation created chaos. Crypto exchanges fumbled to figure out how to implement the 1% tax amid a lack of clear guidelines.

Many Indians denounced the steep 30% tax rate, and most migrated to foreign crypto exchanges in a bid to escape the 1% tax. Starting in February, the study estimates around 1.7 million Indian users switched to foreign exchanges.

In a survey conducted by WazirX and Zebpay with 9,500 respondents who had actively traded between January 1 and April 15, 2022, 24% of Indian investors had said they were considering a move to foreign exchanges. Additionally, the survey found that the tax had impacted the trading frequency of 83% of Indian traders.

Studying a sample of 5,436 peer-to-peer (P2P) traders and industry estimates, the Esya Centre research found that Indians contributed around $9.67 billion in P2P trading volume on foreign exchanges between July and October.

Furthermore, between July and September, crypto adoption measured in terms of mobile app downloads declined by 16% month-on-month for Indian exchanges. During the same period, foreign CEX apps downloads increased by a corresponding 16% month-on-month.

The implications of India’s crypto tax

The above data implies that India’s crypto tax regime has caused liquidity and trading volume from domestic exchanges to fly offshore. The study noted that the primary reason for this capital outflow is the current taxation system, which discourages Indian crypto investors, especially small traders.

This makes the current crypto tax regime “counterproductive” to the goal, the study noted, adding:

“…we anticipate a commensurately 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 study added that a decrease in transaction traceability could negatively impact financial stability.

Moreover, regulatory uncertainty in the crypto markets could lower the ability of domestic exchanges to raise capital compared to their foreign counterparts, the report noted.

Furthermore, the study estimated that if the taxation regime remains the same, Indian investors will continue to use foreign exchanges, draining trading volumes of domestic CEXs. This could ultimately make Indian exchanges ‘unviable.’

Assuming the tax remains unchanged, the research estimated that the cumulative trading volume loss of Indian CEXs will amount to $1.2 trillion over the next 4 years.

To avoid this, the study suggested lowering TDS rates to be at par with those on securities, allowing Indian investors to offset crypto losses, and making tax regulation progressive compared to the current “regressive” model.

Resorting to differentiated tax rates for short and long-term gains could increase tax collection, and possibly curb capital outflow.

If the government incorporates these changes, the study estimated that trading volume on Indian centralized exchanges will return to pre-tax announcement levels within 2 quarters. Additionally, domestic exchanges will receive 50.5% traction from Indian users on average, returning to pre-tax normal.

Lastly, the study noted that the high volume of peer-to-peer trades indicates a need for regulatory oversight and a specific licensing regime for exchanges. The report also suggested the Indian government strengthen international collaboration and learn from international best practices on platforms such as G20.

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