To avoid crypto tax, Indian users take the global exchange route

According to data from AppTweaks, an app analytics platform, shared by industry leaders, Binance alone was downloaded 750,000 times by Indian users in June and July. In addition, Seychelles-based KuCoin and US-based Coinbase received nearly 200,000 downloads each, while around 16,000 users also downloaded San Francisco-based Kraken.

About 40-50% of downloads are usually converted into active users, an executive from crypto exchange WazirX said on condition of anonymity.

“Our view is that investors are moving to foreign, centralized and decentralized exchanges – thereby unwittingly not complying with Indian laws,” WazirX said in a statement. “Data on how much is difficult to assess – a proxy for this phenomenon could be app installs – foreign exchanges saw a jump in app installs during this period, while the Indian exchange’s app installs remained constant,” it added.

India’s new tax rules require exchanges to charge 1% TDS on crypto transactions and remit the same to the Income Tax Department on behalf of the user. Crypto exchanges apply this fee when a user places an order, thus reducing their net profit, to avoid slippage (difference between the expected price of an order and the price when it is actually executed).

However, international exchanges do not use these fees and operate as before. As a result, crypto-assets can be transferred from wallets on Indian to global exchanges by transacting across blockchains. While users who do this incur a one-time transaction fee, called a gas tax, most people see this as a better option than paying TDS every time they make a transaction.

International exchanges such as Binance and KuCoin perform know-your-customer (KYC) checks before allowing trading on their platforms. According to clarifications issued by the Central Board of Direct Taxes (CBDT) vide Circular No. 13 on June 22, stock exchanges must charge 1% TDS on transactions. It is not clarified whether this applies specifically to Indian exchanges.

However, more savvy investors are not concerned about this. For example, a 22-year-old engineering student from Bengaluru said that after transferring assets to Binance, he uses peer-to-peer (P2P) trading options to convert crypto into e-commerce gift cards, thus bypassing taxes. in total.

Binance and KuCoin did not respond to questions. However, in an interview with The Indian Express in July, KuCoin CEO Johnny Lyu said the platform had seen 5.6 million new users in the first half of 2022.

According to a spokesperson from Paxful, a P2P crypto exchange, the platform has nearly 500,000 users from India, and by 2022, over 25% of transactions in India had gift cards exchanged for crypto.

A top executive from one of India’s top exchanges said overnight traders, who made up a large part of India’s crypto community, have quit after the taxes were imposed. Those who remain are “hodlers” – individuals who bet long-term on cryptocurrencies and make large investments over time.

Furthermore, tax lawyers and accountants are unclear about the regulations for declaring and moving such assets abroad. In 2018, the Reserve Bank of India (RBI), in response to a Right to Information (RTI) request, said that no guidelines had been framed for virtual currencies under the Foreign Exchange Management Act (FEMA). “Virtual currency is not recognized as currency under Section 2(h) of FEMA, 1999. Therefore, no guidelines have been framed for virtual currencies under FEMA,” RBI said in the RTI reply.

Anoush Bhasin, the founder of crypto tax advisory firm Quagmire Consulting, said that exchanging crypto profits/income for gift cards is not inherently illegal, as long as individuals declare the income and pay taxes as required. However, using gift cards to avoid bank transactions does not exempt users from tax liability. Confidentiality in the tax return can land users in trouble.

In Circular No. 14 on June 22, the CBDT said buyers would have to deduct TDS in case of P2P transactions. “In a peer-to-peer (ie buyer to seller without going through an exchange) transaction, the buyer (ie the person paying the consideration) is required to deduct tax under section 194S of the Act. The tax deducted on this the manner, must be deposited with the state in accordance with the time and procedure prescribed in the Act together with the relevant provisions of the Income Tax Rules, 1962, the circular states.

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