Tds On Virtual Digital Assets - Navigating The Challenges Of Taxation And Investor Migration

Author: LawSphereX

Category: Technology, Cyber & Privacy

Published: 2026-08-23T21:12:18.057039+00:00

Updated: 2026-08-26T17:06:05.258+00:00

TDS ON VIRTUAL DIGITAL ASSETS: NAVIGATING THE

CHALLENGES OF TAXATION AND INVESTOR

MIGRATION

Jyotirmoy Alayman & Aryan Nagpure, B.A. LL.B. (Hons.) Gujarat National Law University, Gandhinagar

ABSTRACT

Compared to the rest of the world, India has seen a long run of crypto development in quite a short time. With the surge of crypto investors and traders, along with the emergence of Indian crypto exchanges, a recognition of crypto was indeed expected by the Indian crypto community. However, this recognition did come along with a burden. Pursuant to the Finance Act 2022, the Indian government introduced a 1% Tax Deducted at Source (TDS) on Virtual Digital Asset (VDA) transactions through Section 194S of the Income Tax Act, 1961, which led to unintended consequences. TDS is a mechanism under the Income Tax Act, 1961, primarily designed to curb tax evasion.

By mandating the deduction of tax at the point of income generation, TDS ensures that a portion of the tax liability is paid upfront, making it difficult for individuals and entities to evade taxes by concealing income through unregulated transactions. While the TDS mechanism is aimed at curbing tax evasion and simplifying tax administration, when it came to VDAs, it was more focused on tracking and keeping a record of transactions. However, this tax compliance caused a staggering 95% drop in trading volume on Indian crypto exchanges and an estimated $420 million loss in potential government revenue due to the migration of Indian crypto traders to overseas platforms.

Therefore, it is evident how, just for the purpose of tracking the crypto transactions, the current tax structure has not only impacted Indian VDA exchanges and caused a loss in tax revenue but also dismantled the priority purpose of TDS in VDA, which was to track unregulated VDA transactions since investors have already migrated to overseas exchanges. This migration highlights the need to reevaluate the TDS regime on VDAs, analysing the impact on Indian exchanges, revenue losses, and the challenges in monitoring transactions on decentralised platforms. It proposes alternative approaches to strike a balance between effective tax collection and fostering

a thriving crypto ecosystem within India's regulatory framework. By addressing the shortcomings of the current TDS regime, policymakers can mitigate revenue losses, promote compliance, and create a more conducive environment for the growth of the Indian crypto industry while safeguarding the nation’s tax revenue interests. Keywords: Virtual Digital Assets (VDAs), Tax Deducted at Source (TDS), Cryptocurrency, Taxation, Revenue Loss, Investor Migration, Overseas Exchanges. Introduction: It has been around two years since the introduction of the tax on Virtual Digital Asset (“VDA”) transfer, though not a long time but not too early to analyse the tax structure. The Indian government introduced a 1% Tax Deducted at Source (“TDS”) from July 1, 2022 on VDA transfers, also a capital gains tax of 30% on profits from April 1, 2022.

1 Notably, the Income Tax Act, 1961 now defines and recognises VDAs, including cryptocurrencies. 1% TDS applies to every VDA transaction, while profits from one VDA cannot be offset against losses from another, thus increasing the tax burden for traders. These measures mark India’s first official regulation of the crypto industry, aiming to monitor and generate revenue from the growing digital asset market. If compared to tax structures of other countries, it can be seen it is not as progressive as it should be given the time and effort put into formulation. Countries like the USA, Switzerland, and Brazil have different brackets for different duration (both short and long-term) gains held on profits or value held at the end of the financial year. However, no country has a rule for TDS on VDA transfer.

2 Section 194S in the Income Tax Act, 1961 introduced through the Finance Act 20223, mandating the deduction of TDS on consideration paid for the transfer of VDAs to resident persons. 4 Notably, the TDS liability falls on the payer responsible for paying consideration, not the buyer. In VDA transactions through exchanges or brokers, multiple entities may be involved, leading to potential TDS obligations at multiple stages, creating a compliance burden.

1 Income-Tax (20th Amendment) Rules, 2022.

2 Rajagopal Menon, Navigating the crypto tax landscape: A global comparison (Feb 12, 2023), The Economic Times, https://economictimes.indiatimes.com/markets/cryptocurrency/navigating-the-crypto-tax-landscape-aglobal-comparison/articleshow/97835630.cms?from=mdr.

3 Income Tax Act, 1961, § 194S, No. 43, Acts of Parliament, 1961 (India).

4 Ministry of Finance, G.S.R. 482(E) (Notified on 30th June, 2022).

Exchanges facilitating VDA transfers would be required to deduct TDS when crediting/paying the VDA owner, even if the buyer directly pays the exchange or through a broker. On the liability to deduct tax under Section 194S5 for VDA transfers involving exchanges and brokers, the Central Board of Direct Taxes (“CBDT”), through its notification, issued guidelines:

1. If VDA is transferred through an exchange without a broker, the exchange is

responsible for deducting tax.

2. If VDA is transferred through an exchange with the involvement of a broker, the broker

is responsible for deducting tax.

3. When the VDA being transferred is owned by the exchange itself, the buyer or the payer

of consideration is responsible for deducting tax.

4. If the VDA being transferred is owned by the exchange and is purchased through a

broker, the broker will be responsible for deducting tax. 5. In the situations mentioned above, if the transfer of VDA is done through a nonmonetary exchange or in exchange for another VDA, the payer of the consideration will be responsible for deducting tax. It is to be noted that TDS facilitates the prevention of tax evasion; however, when it comes to VDAs, it is hard to comprehend how it shall prevent tax evasion, as the existence of decentralised exchanges has always been evident to investors and traders. 6 Merely banning access to certain exchanges, such as Binance, won’t stop investors from migrating to offshore decentralised exchanges. 7 It makes more sense to see the imposed TDS facilitate government surveillance on VDA transactions. It is also important to examine the requirement of such a high slab of TDS without it fulfilling its purpose of tax evasion.

This paper shall explore the understanding and requirement of TDS on Virtual Digital Assets

5 Income Tax Act, 1961, § 194S, No. 43, Acts of Parliament, 1961 (India).

6 Parthasarathi Shome Pawan K. Aggarwal Kanvvarjit Singh, The System of Tax Deduction at Source (TDS) : Coverage, Functioning and Suggestions for Reform 12 (National Institute of Public Finance and Policy 1996). 7 Navdeep Singh, India bans foreign crypto platforms like Binance, Kucoin. What should investors do now? The Economic Times (Jan 14, 2024, 11:47:00 AM) https://economictimes.indiatimes.com/markets/cryptocurrency/india-bans-foreign-crypto-platforms-likebinance-kucoin-what-should-investors-donow/articleshow/106830654.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.

and the impact it has made post its introduction towards centralised exchanges in India and also a loss of tons of tax revenue. Furthermore, this paper will highlight the cost of implementing this structure and provide suggestions for its betterment. Understanding the TDS Tax System in India with regard to VDA Introduction to TDS on VDAs in India and its repercussions Under the garb of revenue mobilisation, the Government of India proposed a scheme for the taxation of Virtual Digital Asset by inserting Section 194S in the Income Tax Act, 19618, through the Finance Act, 2022 for providing a deduction of 1% Tax on Source on payments made on the transfer of VDAs. The new section mandated that a person who is responsible for paying any resident any sum by way of consideration for the transfer of a virtual digital asset to deduct an amount equal to 1% of such sum as income tax thereon.

The tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier. 9 This policy stance was intended to achieve the objective of tracking VDA transactions of Indian residents and their sources of income in order to bring financial stability over the speculations on trading in VDAs.

8 Income Tax Act, 1961, § 194S, No. 43, Acts of Parliament, 1961 (India).

9 Central Board of Direct Taxes (TPL Division), Circular no. 14 of 2022, F. No. 370142/29/2022-TPL (Part 1), (June 28, 2022).

Figure 1- Centralised VDA Exchanges Volume10 India’s tax policy on VDAs is the most regressive in comparison to other countries that have adopted and given legal recognition to VDAs and has had the most damaging impact on Indian centralised exchanges. This has caused a massive shift of Indian investors from Indian centralised exchanges to foreign counterparts as a consequence of these regulations. Figure 1 highlights the declining impact and the need for reassessment of the current tax architecture on the Indian VDA market. There is a notable fall in the volumes of each of the three Indian VDA exchanges at the relevant regulatory inflexion points/events. There is also a consistent fall from the Budget announcement (i. e. , 1 Feb 2022) to the levy of one per cent TDS on VDAs (1 Jul 2022).

11 While the government’s intention to improve VDA transparency and consequent macroeconomic stability is an optimistic move, many experts argue that extant VDA taxation architecture defeats this purpose. The TDS rate disincentivises Indian market participants to 10 Dr. Vikash Gautam. Virtual Digital Asset Tax Architecture in India: A Critical Examination. Special Issue No. 208, January 2023, Esya Centre. 11 Dr. Vikash Gautam. Virtual Digital Asset Tax Architecture in India: A Critical Examination. Special Issue No. 208, January 2023, Esya Centre.

operate through centralised domestic exchanges in favour of foreign counterparts. 12 Overview of the 1% TDS requirement under Section 194S The TDS provisions under Section 194S are applicable to both residents and non-residents. The obligation to deduct TDS falls on the person responsible for paying the consideration for the transfer of VDAs to a resident. This includes exchanges, brokers, and individuals facilitating such transfers. The TDS is required to be deducted at a rate of 1% on the total consideration paid for the VDA transfer, irrespective of the buyer’s or seller’s income tax slab rate. Further, the deducted amount must be deposited with the government, and the buyer is required to furnish details of the transaction and TDS deducted in specific forms.

CBDT Guidelines on TDS Implementation The Central Board for Direct Taxes issued certain important guidelines in the form of Circular No. 13 of 202213, dated June 22, 2022, for transactions conducted on or through an Exchange (“Guidelines”), as well as Circular No. 14 of 2022 (“Circular”) for other transactions. 14 The Guidelines specifically clarify as regards the obligations and roles that the Exchange can play as regards discharging the TDS while recognising the practical difficulties for crypto buyers to determine whether the VDA being transferred is being owned by a seller resident in India or otherwise or by the exchange and thus determine, his/her liability to deduct TDS.

15 This deduction is not required to be made in the following cases:- the consideration is payable by a specified person, and the value or aggregate value of such consideration does not exceed fifty thousand rupees during the financial year; or 12 R Patnaik, Reema Arya & Mohak Thukra, Unfavourable tax regime may impact growth of virtual digital assets in India (May 29, 2024) virtual digital asset: Unfavourable tax regime may impact growth of virtual digital assets in India - The Economic Times (indiatimes. com). 13 Central Board of Direct Taxes, Circular No. 13 of 2022 F. No. 370142/29/2022-TPL (Part-I) (Issued on 22 June, 2022).

14 Central Board of Direct Taxes, F. No. 370142/29/2022-TPL (Part-I), (Issued on 22 June, 2022).

15 Stella Joseph, Guidelines on TDS on transfer of Virtual Digital Assets, ECONOMIC LAW PRACTICES, (Jan 19, 2022), https://elplaw.in/guidelines-on-tds-on-transfer-of-virtual-digital-assets/.

the consideration is payable by any person other than a specified person, and the value or aggregate value of such consideration does not exceed ten thousand rupees during the financial year. 16 The following are defined as “specified person” for the purposes of this provision: 1. An individual or Hindu undivided family (HUF) who does not have any income under the head “profit and gains of business or profession”; and 2. An individual or HUF having income under the head “profits and gains of business or profession”, whose total sales/gross receipts/turnover from business carried on by him does not exceed one crore rupee or in case of profession exercised by him does not exceed fifty lakh rupees. This threshold is to be seen in the financial year immediately preceding the financial year in which the VDA is transferred.

17 Key Aspects of the Section 194S Guidelines If the transfer of VDA takes place on or through an Exchange (who does not own the VDA), then the transaction chain may look something like this: Buyer⇒ Broker ⇒ Exchange ⇒ Broker ⇒ Seller (owner) Here, a buyer would credit the payment to the exchange (directly or through a broker). The exchange will then be required to credit the payment to the owner of the VDA (directly or through a broker). In this case, many parties are involved, but the exchange making the payment to the seller shall deduct TDS. However, if the payment between the seller and the exchange is made through a broker, then both parties are responsible for deducting tax. Alternatively, the exchange and broker may agree that the broker will deduct TDS on all such transactions. The exchange is required to furnish a quarterly report in Form No. 26QF on or before the due date.

18 16 Central Board of Direct Taxes (TPL Division), Circular no. 14 of 2022, F. No. 370142/29/2022-TPL (Part 1), (June 28, 2022).

17 Id.

18 CLEAR TAX, https://cleartax.in/s/tds-under-section-194s-of-income-tax-act (last visited May 21, 2024).

Transactions Through Exchanges The Circular No. 13 of 2022, dated June 22, 2022, recognised the practical challenges faced by buyers in determining whether the Virtual Digital Asset being transferred is owned by a resident seller or the exchange itself. This information is crucial for the buyer to ascertain their TDS liability correctly. To address this challenge, the circular outlines various scenarios and provides guidance on the roles and responsibilities of exchanges, buyers, sellers, and brokers in deducting and depositing the TDS. It specifies the procedures to be followed in cases where transactions involve brokers or where the exchange itself owns the VDA.

By issuing Circular 13/2022, the CBDT aimed to facilitate smoother implementation of the TDS provisions for transactions occurring on crypto exchanges, which are expected to account for a significant portion of VDA transfers in India. Transactions through exchanges that don't own the VDA If the transfer of VDA takes place on or through an exchange (who does not own the VDA), then the exchange shall make the TDS at 1% and remit the balance amount of consideration to the seller. Where no broker is involved, the tax may be deducted only by the Exchange, which is crediting or making payment to the seller (owner of the VDA being transferred). 19 Where the broker is the Seller (Owner of VDA), in this type of transaction, there would be liability on both legs when the exchange pays to the broker and when the broker pays to the seller.

Where the broker is not the Seller, the responsibility to deduct tax would be on both the Exchange and the broker. However, if there is a written agreement between the Exchange and the broker that the broker shall be deducting tax on such credit/payment, then the broker alone may deduct the tax. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions on a quarterly basis.

19 Arijit Ghosh and Ipsita Agarwalla, TAXATION OF CRYPTO-ASSETS: Emerging regime for Virtual Digital

Assets, https://www.nishithdesai.com/NewsDetails/6211, (last visited May 21, 2024).

Exchange owning the VDA Exchange of VDA(in kind) Via Broker, Barter for Another One In contrast to the examples mentioned earlier, the payments have the potential to be made in different forms, either partially or entirely through goods or services, or through a trade for something else. In such situations, the exchange may deduct taxes on both sides of the transactions according to its agreement. When the transaction is not conducted through an exchange, it is necessary for the individual making the payment to deduct and deposit the TDS. Exchange of VDAs in-kind or barter

1. The exchange will keep records for every trade between VDA participants.

2. The exchange will convert the tax withheld in kind to one of the main VDAs [Bitcoin

(BT), Ethereum (ETH), USD Tether (USDT), and USD Coin (USDC), etc.], which can be easily converted into Indian Rupees (INR).

3. The tax withheld needs to be accumulated for the entire day, from 00:00 to 23:59.

4. Convert the accumulated balance of primary VDAs with Exchange at 00:00 hours into

INR at the market rate by placing a sell order.

5. The Exchange should send the customer a contract note that includes the TDS on VDA

withheld in kind and its INR value after conversion.

6. The exchange must deposit the INR value in the government account by the specified

due dates. 30% Tax on Income from VDA Transfers for the Transferor In addition to the 1% TDS, the Finance Act, 2022, also introduced a flat 30% tax rate on income arising from the transfer of VDAs. This tax is applicable to the transferor (seller) of the VDA and is levied on the total income arising from such transfers, without the benefit of deductions or exemptions typically available for other income sources. The 30% tax rate is significantly higher than the standard income tax slabs, which range from

5% to 30% for individuals and Hindu Undivided Families (“HUF”). This higher rate aims to capture a substantial portion of the gains realized from VDA transactions, given the volatility and speculative nature of the crypto market. It is crucial to note that the 30% tax on VDA transfer income is separate from the 1% TDS under Section 194S, which is a withholding tax deducted at source. The transferor is still required to pay the 30% tax on the remaining income after deducting the TDS amount. Taxation of Receiving VDAs for Inadequate Consideration The Finance Act, 2022, also introduced provisions to tax the receipt of VDAs for nil or inadequate consideration. This measure aims to capture instances where VDAs are received as gifts, rewards, or for services rendered without adequate compensation.

Under the new rules, if an individual receives VDAs without consideration or for inadequate consideration, the fair market value of the VDAs received shall be deemed as their income and subject to taxation. The taxable value is determined based on the prevailing market rates on the date of receipt. This provision aims to prevent individuals from avoiding taxes by receiving VDAs as alternative forms of compensation or gifts. It ensures that the value of such VDA receipts is captured within the taxable income of the recipient, preventing any potential tax evasion or avoidance.

A case for Reducing the TDS Bracket on VDA Transactions

Facilitating the Growth of Centralized Crypto Exchanges Figure 2: Centralised VDA Exchanges Volumes20 TDS requirement on VDA places a significant administrative and compliance burden on Indian crypto exchanges. The guidelines allow exchanges to take on the TDS obligation to facilitate trading, but this comes with the high costs of tracking transactions, deducting TDS, maintaining records, depositing taxes, filing reports, etc. This additional overhead makes it challenging for Indian crypto exchanges to grow and compete with international exchanges that don’t face such heavy tax compliance requirements and has led to a 60.8% fall in the volumes of Indian centralised VDA exchanges. A significant negative impact of the current tax architecture on the centralised VDA exchanges

prompts a pertinent policy question. That is, where does the crowded-out liquidity from the Indian VDA exchanges, due to the current tax architecture, end up? If investors channel their activities offshore, the Indian VDA tax design is counterproductive. 20 Dr. Vikash Gautam. Virtual Digital Asset Tax Architecture in India: A Critical Examination. Special Issue No. 208, January 2023, Esya Centre.

Thus, reducing the TDS rate or raising the threshold could help ease this burden and allow Indian exchanges to allocate more resources towards growth, innovation, and improving user experience. Attracting Investors Back to Indian Exchanges The shift of Indian crypto investors towards international exchanges that don’t face such taxes on transfers is caused by the introduction of this taxation system. This capital flight reduces trading volumes and liquidity on Indian exchanges and further migration to foreign exchanges. Figure 3: Online Traffic from India into Foreign and Domestic Centralised VDA Exchanges21 Liquidity flows from Indian to foreign centralised VDA exchanges are due to the substitution effect, which has caused a shift in traffic from Indian to foreign centralised VDA exchanges out of the total number of Indians who traded through either of these kinds of exchanges.

Thus, a lower TDS rate could help make Indian exchanges more attractive and competitive compared to international platforms, bringing investors and trading activity back to the domestic ecosystem. More liquidity concentrating on regulated Indian exchanges is beneficial for oversight and tax collection as well. 21 Dr. Vikash Gautam. Virtual Digital Asset Tax Architecture in India: A Critical Examination. Special Issue No. 208, January 2023, Esya Centre.

Potential Boost in Tax Revenue Generation Government data shows that around INR 257. 6 crores was collected as TDS from July 1, 2022 to October 1, 2023. This allows for an evaluation of the effectiveness of the 1% TDS by comparing the TDS collected with the potential TDS that could have been generated from India's total VDA volume. If the 1% TDS rate leads to a significant decrease in trading activity on Indian exchanges, it is possible that the government may end up collecting less tax overall. By reducing the TDS rate to a more reasonable level that doesn’t severely diminish trading volumes, the government may actually be able to increase long-term tax revenues. A lower rate applied to a larger base of domestic trading activity could outweigh the higher 1% rate applied to a smaller trading base. This would create a healthier crypto ecosystem in India while optimising tax collection.

In summary, while the 1% TDS aims to increase revenues, it creates significant compliance costs that hinder Indian exchanges and drive activity offshore. The 1% TDS levy has not made the Indian VDA market transparent, as most of the business that should be covered by TDS is conducted on offshore platforms. Furthermore, considering all the above factors, a reduced TDS rate could foster a stronger domestic crypto industry, retain investors, and potentially increase long-term tax revenues by nurturing a larger tax base. Authorities should consider lowering the TDS rate to strike a better balance between tax collection and industry growth objectives.

Impact of TDS on the Indian Crypto Ecosystem The discussion now has led to the analysis of the impacts that the TDS imposition has caused to the Indian Crypto Ecosystem, First, it would surely be the centralized crypto intermediaries who have lost a significant customer base post the notification for imposition of the current tax situation22. Investors and traders have migrated to offshore decentralized exchanges just post the notification; this has resulted to transfer of extravagant sum of crypto from these centralized exchanges to decentralized offshore exchanges23. Second, since we have already discussed the 22 Mitaksh Jain, Here’s why Indian crypto exchanges are worried about impact of 1% TDS on crypto trading (July 14, 2022), https://www. medianama. com/2022/07/223-crypto-exchanges-impact-of-1-tds-2/.

23 Teena Jain Kaushal, Up to 5 million crypto users shifted to offshore trading platforms: Report (Nov 09, 2023), https://www. businesstoday. in/personal-finance/news/story/up-to-5-million-crypto-users-shifted-to-offshoretrading-platforms-report-405221-2023-11-09.

real idea behind application of TDS on VDS, this also has led to loss of high value traders and investors transaction information to the government for which majorly this tax structure was imposed24. Finally, the significant loss of tax revenue the government has lost. Challenges faced by Centralized Crypto Exchanges. It is evident how the imposition of a 1% tax deducted at source (TDS) on virtual digital asset (VDA) transactions was intended to capture income generated by Indian residents from VDA activities. 25 However, the immediate and drastic reduction in trading volumes on Indian exchanges, coupled with the lack of comparable impact on foreign VDA platforms, indicates a significant change in the trading behaviour of Indian investors.

The borderless nature of VDAs and the ease of establishing trading platforms in foreign jurisdictions have facilitated an exodus of users, funds, and trades to offshore platforms. This has resulted in a distributional consequence, whereby Indian VASPs (Virtual Asset Service Providers), now subject to reporting requirements under the Prevention of Money Laundering Act (PMLA) and facing potential imprisonment for TDS evasion, have been disproportionately affected. 26 The migration of VDA trading activities offshore has become a central concern in policy discussions surrounding the Indian VDA landscape. The ESYA Assessment on TDS Report provides, Indian Centralized exchanges have seen a fall over 95% post this, as per estimates between three to five million people have shifted from Indian exchanges to offshore exchanges.

It is already a known fact how compared to rest of the world, India has a good share of crypto investors and migration to offshore exchanges have been a huge revenue impact to Indian Exchanges. 27 A country who is aiming towards becoming a global cyber hub, such tax structure is explicitly flawed, neither working for the investors nor for the intermediaries or the government. Shift of Investors to Offshore Exchanges As till December 2023, there are more than 19 million registered crypto investors in India with

24 Economic Times, 1% TDS hammers crypto trading (4 July 2022),

https://economictimes.indiatimes.com/tech/newsletters/morning-dispatch/1-tds-hammers-crypto-tradingzomato-delayed-blinkit-disclosure-investors-tell-sebi/articleshow/92638582.cms?from=mdr.

25 Kelvin Munene Murithi, KuCoin India to Implement 1% TDS on Crypto Transfers (April 9, 2024),

https://coingape.com/kucoin-india-to-implement-1-tds-on-crypto-transfers/.

26 Ministry of Finance, F.No. 9-8/2023/COMPL/FIU-IND (Issued on July 4 2023).

27 Dr. Vikash Gautam. Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market. Special Issue No. 210, November 2023, Esya Centre.

around 75% of them being in the age group of 18-35. 28 However, this number is not as big as it seems, since the average exchange trade volume of top five Indian exchanges were around $230 million which is significantly low. This is due migration of investors to offshore exchanges; therefore investors are registered to Indian exchanges however their investments are transferred to offshore exchanges. Chain analysis, a US-based blockchain analysis firm, published a report on global cryptocurrency adoption. According to the report, from July 2022 to July 2023, Indian users conducted cryptocurrency transactions on foreign exchanges with a total value of $270 billion, ranking first globally. 29 Additionally, India's ranking in peer-to-peer (P2P) cryptocurrency trading rose by 77 positions to fifth place worldwide.

Compared to current trade volume of Indian Exchanges, this number is almost 1173 times more. 30 It shows the amount of investments made by investors in Indian exchanges and how post introduction of the current tax structure there was a fall of more than 97% in volume. The crypto landscape in India is facing material challenges that have triggered a brain drain scenario. The diminishing business sustainability and market interest have led to a reduction in the employment of skilled professionals, along with the cramping environment for sustainable operations, which has compelled numerous crypto and VDA startups to relocate their enterprises offshore to maintain competitiveness with potentially non-compliant entities operating in regulatory grey areas. A prime example of this talent diaspora is Ethereum Layer-

2 scaling startup Polygon, which, despite its Indian provenance, has established its headquarters

in the Middle East and harbors a globally distributed workforce spanning jurisdictions such as Switzerland, Belgrade, and the United States. 31 At the same time, some companies are not following India's tax rules for crypto and virtual digital assets. This could lead to unfair practices and hurt India's position in emerging 28 Ajinkya Kawale, India has over 19 million crypto investors with 75% youth: Report, Business Standard (Dec 22, 2023), https://www. business-standard. com/markets/cryptocurrency/india-has-over-19-million-cryptoinvestors-with-75-youth-report-123122200814_1. html. . 29 Chainalysis Report, The 2023 Geography of Cryptocurrency (Oct 2023), https://go. chainalysis. com/rs/503- FAP-074/images/The%202023%20Geography%20of%20Cryptocurrency%20Report. pdf? version=0. 30 Chainalysis Report, The 2023 Geography of Cryptocurrency (Oct 2023), https://go. chainalysis.

com/rs/503- FAP-074/images/The%202023%20Geography%20of%20Cryptocurrency%20Report. pdf? version=0. 31 Suvashree Ghosh and Siddharth Shukla, ‘Crazy’ crypto brain drain rooted in India’s regulatory limbo, says Polygon co-founder (11 March, 2022), The Print, https://theprint. in/economy/crazy-crypto-brain-drain-rootedin-indias-regulatory-limbo-says-polygon-co-founder/868449/.

technologies like blockchain and Web3 in the long run. Loss of potential government revenue The government collected around $31. 2 million in TDS from July 1, 2022 to October 1, 2023 on cryptocurrency/virtual digital asset transactions with a potential loss of $420 million in revenue. 32 This data can be used to evaluate how effective the 1% TDS tax rate was by comparing the TDS collected to the total potential TDS that could have been collected based on the entire trading volume of cryptocurrencies/virtual digital assets by Indians, both on Indian exchanges and foreign exchanges.

Though it is understandable TDS revenue is not given much eye upon as the purpose of TDS mostly relates to tax evasion and transaction surveillance as for the aspect of VDAs but it is also to consider the opportunity cost of the tax structure, now that the burden being upon Indian Exchanges, along with loss of revenue. Above everything mentioned it is also flawed to see how transaction surveillance would further facilitate in this structure as high value investors have already migrated to offshore exchanges leaving only a fraction of Indian investors left to monitor. Recommendations The current tax structure already lacks in of definition and also consists loopholes, hence it must be recommended to alter the structure with inclusion of short term and long-term capital gains along with regulations for crypto futures too.

Changes must be made in regards to, rationalising tax norms, reduction of TDS and access to central KYC registry. Rationalization of tax on gain The current tax on gains compared to other countries who have a tax structure on crypto might seem reasonable however with no distinction and exemption in the Indian structure poses more problem. A short-term (less than a year) gain tax in the United States would be from somewhere around 10%-37% and long-term (more than a year) 0% / 10% / 20% (Depending on individual or combined income). Along with this they also have a proper tax slab made for all income groups. India’s current structure, which is 30% straight on capital gains with no option for loss 32 Chitranjan Kumar, Budget 2024: Crypto investors and exchange owners seek tax cut to revive ailing industry (Feb 1, 2024), Fortune India, https://www. fortuneindia.

com/budget-2024/budget-2024-crypto-investors-andexchange-owners-seek-tax-cut-to-revive-ailing-.

set off. There must be brought more definition to this structure so as to accommodate more investor growth and promote rationalized taxation. Reduction of TDS to meet required purpose The TDS being a major sailor of investors to offshore exchange must be changed big time. The purpose of tracking transaction to prevent illegal activities gets defeated if there are no major investors remaining in the domestic exchanges itself. With the PMLA notification already helping to address concerns about money laundering and terror financing, making a high TDS rate unnecessary. TDS must be reduced and structured in the similar way as Securities Transaction Tax (STT) which has been already successful bringing about 22,000 Crores in tax revenue every year. A sweet spot of 0.01% TDS would facilitate the government in fulfilling the priority purpose

of tracking transaction along with promoting a rational crypto environment for investors without making any huge potential revenue loss. Better KYC Moderation along with due diligence by intermediaries It also recommended that better KYC moderation would facilitate the government along with domestic exchanges to keep track of investors and their activities. Government apps such as DigiLocker could be used by exchanges for meeting such moderation to ensure safety of customer data along with secured verification. The due diligence must be maintained by exchanges in terms of investor behaviour, keeping safeguard for fraudulent activities and fair communication with law enforcement agencies Conclusion The introduction of the 1% Tax Deducted at Source (TDS) on Virtual Digital Asset (VDA) transactions in India has had significant unintended consequences on the domestic crypto ecosystem.

The compliance burden and high tax rate have driven a substantial portion of trading activity and investors to migrate from Indian centralised exchanges to offshore decentralised platforms. This migration has not only impacted the sustainability of Indian VDA businesses but has also resulted in a considerable loss of potential tax revenue for the government.

While the intention behind the TDS was to facilitate transaction monitoring and curb tax evasion, the current structure has failed to achieve this objective. The flight of high-value traders and investors to offshore exchanges has undermined the government's ability to track and regulate a significant portion of VDA transactions involving Indian residents. To address these challenges and strike a balance between effective tax collection and fostering a thriving domestic crypto industry, a comprehensive revaluation of the TDS regime on VDAs is imperative.

This paper has recommended the rationalisation of tax norms, which gives more nuanced tax structures which don’t drive the investors away from Indian markets, which would essentially require the reduction in tax labs to a more reasonable level and usage of alternatives like KYC procedures for monitoring transactions which would, in turn, create a more conducive environment for the growth of the domestic crypto industry. This balanced and processive approach can strengthen the ability of exchanges to monitor transactions and will not affect investor behaviour which is crucial for India to maintain its competitive edge in the rapidly evolving global crypto landscape.