New Delhi: India’s treatment of Virtual Digital Assets (VDAs) over the past few years has been marked by a clear contradiction: the ecosystem is heavily taxed and monitored, yet fundamentally unrecognized within a coherent regulatory framework. This ‘tax-first, regulate-later’ approach has shaped market behavior in ways that domestic regulators are now urgently confronting, particularly amid ongoing parliamentary reviews into digital asset oversight.
The Finance Act, 2022, imposed a flat 30% tax on gains and a 1% Tax Deducted at Source (TDS) on every transaction. While this was intended to create a reporting trail and bring transparency, it has also had the unintended effect of fragmenting the market. The numbers illustrate this shift starkly: domestic exchanges today account for only about 8–10% of total trading volume, roughly ₹45,000 crore in FY24–25. In contrast, offshore trading volumes have expanded sharply from ₹2.63 lakh crore in FY23–24 to nearly ₹4.88 lakh crore in FY24–25. This is not simply a matter of user preference; it reflects a structural arbitrage embedded in policy design. A trader executing the same transaction faces a 1% upfront deduction on an Indian platform, but effectively no such friction when trading through an offshore exchange—a decisive difference in high-frequency or liquidity-sensitive markets.
This divergence has created a one-sided tax compliance architecture. Domestic exchanges have effectively become the only meaningful channel for TDS collection, remitting approximately ₹338 crore across FY22–23 and FY23–24, and an estimated ₹450 crore in FY24–25 alone. Offshore exchanges, despite serving a large Indian user base, neither deduct TDS nor consistently share granular user-level data with Indian authorities. This creates a dual system: one that is compliant but commercially disadvantaged onshore, and another that is liquid but less visible to regulators offshore.
Policymakers are increasingly aware that this imbalance has fiscal implications. The migration of trading activity overseas represents not just a regulatory gap, but also a loss of potential tax revenue. Parliamentary interventions have flagged concerns around “foregone tax collections” and the inability to effectively track cross-border VDA transactions. At the same time, enforcement agencies have stepped up scrutiny, particularly in cases involving large cross-border flows, signalling that the current approach is being stress-tested in real time.
One emerging idea is the use of interim mechanisms such as a self-regulatory organisation (SRO), operating under the oversight of existing regulators, to bridge the current gap. Alongside this, there is growing emphasis on aligning India’s reporting standards with global frameworks, particularly in relation to user-level data sharing and tax residency disclosures. These developments suggest that the focus is shifting from merely taxing transactions to building a system that can actually supervise them.
Looking ahead, three themes are likely to define outcomes from the current session. First, the trajectory points toward calibrated regulation with an interim SRO-based framework. Second, the limitations of the existing tax regime, especially the 1% TDS, are now widely recognised, opening the door for potential recalibration. Third, and most importantly, there is a clear policy imperative to bring offshore exchanges within the Indian regulatory and tax net, whether through registration requirements, reporting obligations, or market access conditions. If the momentum seen in the current parliamentary session translates into concrete policy action, India has an opportunity to rebalance its crypto ecosystem and reclaim both regulatory visibility and economic value.
