India’s 30 percent crypto tax came into effect on March 31 and went into effect on April 1, despite warnings from multiple stakeholders about a potential negative impact on the burgeoning crypto industry.
As predicted, trading volume on major crypto exchanges dropped by as much as 90% in just a few weeks after the new crypto tax law went into effect. The drop in trading activity has been attributed to traders either diverting their funds from centralized crypto exchanges or adopting a hold strategy over trading.
Many crypto exchanges hoped that a crypto tax would at least offer some form of recognition to the crypto ecosystem and help them get easy access to banking services. However, the effect was the opposite.
On April 7, the National Payment Corporation of India (NPCI) issued a statement claiming that it is not aware of any crypto platforms that use the Unified Payments Interface (UPI) — the national fiat payment gateway.
While crypto exchanges didn’t use the UPI directly, they previously worked with multiple payment processors with UPI access to facilitate fiat-to-crypto onboarding.
This is a common strategy adopted by several leading crypto platforms around the world. Binance has done so in the UK, Malaysia and a few other jurisdictions after being banned from directly accessing the national fiat payment gateway in the respective countries.
However, according to the NPCI’s April 7 statement, payment processors — allegedly out of undue caution over the government’s hostile stance on crypto — began cutting ties with crypto platforms.
Now Indian crypto exchanges can’t even find a third-party payment processor despite newly introduced crypto tax laws.
This, combined with the draconian tax policy, is causing crypto platforms in the country to consider moving to more crypto-friendly jurisdictions, with Dubai being the top choice. Sathvik Vishwanath, CEO of Indian crypto exchange Unocoin, told Cointelegraph:
“Unfair tax policy in India is causing people to consider alternative countries like the United Arab Emirates for their new projects. On the other hand, people are more likely to consider working for foreign countries to avoid tax confusion. India needs to improve its crypto industry tax laws.”
The brain drain has begun
The Indian crypto ecosystem has thrived in recent years, spawning several unicorns despite a lack of regulatory clarity. Many ecosystem stakeholders had expressed their confidence in the government and hoped to get clarification soon. However, with the enactment of the regressive tax laws, many crypto platforms are already choosing to move abroad.
A local crypto educator and expert who is familiar with the matter and prefers to remain anonymous told Cointelegraph that Polygon, one of India’s leading Ethereum scaling solutions, intends to move its base to Dubai along with Push Token. None of these firms responded to Cointelegraph’s inquiries at the time of publication.
Pushpendra Singh, a leading crypto entrepreneur and founder of crypto media platform SmartView AI, told Cointelegraph:
“India’s reluctance to embrace digital assets is prompting thousands of developers, creators, startups, investors and traders to migrate to countries with friendlier regulators, such as Dubai or El Salvador. According to a recent report, the Dubai DMCC Free Zone has said that 16% of new company registrations recorded in the first quarter of 2022 were crypto and blockchain companies. Millions of young talented Indians from different disciplines have left Indian soil in search of better opportunities. Most countries encourage the development of Web3, Metaverse and Blockchain.”
The Indian government has failed to come up with a draft crypto law since 2018, despite promises. At the same time, it rushed to formulate new crypto tax laws within two months, heavily inspired by the country’s gambling and betting laws. The government failed to solicit input from stakeholders in the crypto ecosystem and the disastrous impact is visible to all within the first month.
In March, Polygon co-founder Sandeep Nailwal warned about the possible crypto brain drain scenario. He said at the time that the Indian government’s approach to crypto would certainly lead to a crazy brain drain situation:
“I want to live in India and promote the Web3 ecosystem. But overall, with the way the regulatory uncertainty exists and how big Polygon has grown, it doesn’t make sense for us or any team to expose their protocols to local risk.”
Crypto exchange WazirX founder Nischal Shetty, who has reportedly moved his base to Dubai, shared similar concerns with Cointelegraph:
“The challenges facing crypto investors today can lead to a number of downsides for the entire system. It may also result in traders transacting on peer-to-peer exchanges rather than the Indian exchanges which are Know Your Customer compliant. It will also result in the state losing tax revenue. In such unfavorable circumstances, we will see more and more crypto and Web3 startups migrate abroad. We need to stop this brain drain by putting in place more enabling and concrete policies to help us succeed in India.”
Is there a solution?
The Central Bank of India is currently the biggest supporter of a blanket ban on crypto usage, while many ministers in the current regime have called for a higher crypto tax, citing its use for illegal activities. Considering the current stance of the government and ministry responsible for formulating crypto regulations, there is little hope for a change in stance and until the government realizes the damage it has done with its policies. The majority of Indian crypto platforms may have already moved.
A key concern for Indian ministers appears to be the use of crypto for illicit activities. However, this notion has been debunked several times over the years, and the most recent report by Chainalysis shows that the use of crypto for illicit activities has dropped to less than 1% of the total circulating supply.
The need of the hour is an impressive crypto framework, and the government can draw inspiration from its Asian counterparts such as Thailand and Malaysia. Thailand scrapped its early proposal of a 15 percent crypto tax on capital gains and also exempted traders from VAT on regulated exchanges to encourage crypto use. The Indian government must act quickly to repair the damage. Otherwise it will be a spectator in the Web3 race.
Mohammed Danish, Chief Legal Officer at crypto exchange BitDrive, concluded: “While India has been at the forefront of producing some extraordinarily talented builders in the Web3 space, bringing great value to the industry globally, it has failed miserably to create a creating a conducive atmosphere that the Web3 projects are operating out of India due to their ambiguous regulatory policies regarding the activities related to the use of crypto.”
“The recent move to ban retail payments for crypto exchanges is a fresh example that has seen trading volumes on some platforms plummet by as much as 90%. There is no legal justification for denying payments access to the exchanges. Such unexpected and unwarranted actions are also pushing Web3 projects to shift their base to more comfortable jurisdictions like Dubai, Singapore, Portugal and others. The government urgently needs to take corrective action to stop this brain drain in the best interest.”
https://cointelegraph.com/news/brain-drain-india-s-crypto-tax-forces-budding-crypto-projects-to-move India’s Crypto Tax Forces Budding Crypto Projects to Relocate