India’s 30 percent crypto tax became law on March 31 and took effect on April 1, despite warnings from some stakeholders that it could have an adverse effect on the fledgling crypto industry.
As predicted, trading volumes on major cryptocurrency exchanges dropped by 90% in just a few weeks after the new crypto tax law went into effect. The decline in trading activity has been attributed to traders moving funds away from centralized cryptocurrency exchanges, or adopting holding strategies instead of trading.
Many cryptocurrency exchanges hope that a cryptocurrency tax will at least provide some form of recognition to the crypto ecosystem and help them gain easy access to banking services. However, the effect was just the opposite.
On April 7, the National Payments Corporation of India (NPCI) issued a statement stating that they are not aware of any crypto platforms that use the Unified Payments Interface (UPI), India’s fiat payment gateway.
While cryptocurrency exchanges do not directly use UPI, they have previously partnered with several payment processors that have UPI access to facilitate fiat-to-crypto exchanges.
This is a common strategy employed by several leading crypto platforms in the world. Binance has done so after it was banned from directly accessing national fiat payment gateways in the UK, Malaysia and several other jurisdictions.
However, following the NPCI’s April 7 statement, payment service providers began cutting ties with cryptocurrency platforms, ostensibly out of excessive caution over the government’s hostile attitude towards cryptocurrencies.
Now, despite the new crypto tax law, crypto exchanges in India can’t even find third-party payment processors.
This, coupled with draconian tax policies, 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 cryptocurrency exchange Unocoin, told Cointelegraph:
“India’s unfair tax policy makes people consider relocating projects to other countries like UAE. On the other hand, people are more likely to consider working abroad to avoid tax confusion. India needs to revise crypto tax laws.”
The brain drain has already begun
The Indian crypto ecosystem has flourished over the past few years, producing several unicorns despite a lack of regulatory transparency. Many stakeholders in the ecosystem have expressed confidence in the government, hoping to gain some transparency soon. However, with the entry into force of the crypto tax law, many cryptocurrency platforms have decided to move overseas.
A local crypto educator and expert familiar with the matter told Cointelegraph that Polygon, one of India’s leading Ethereum scaling solutions, is looking to move its base to Dubai along with Push Token.
Pushpendra Singh, a leading crypto entrepreneur and founder of crypto media platform SmartView AI, told Cointelegraph:
“India’s indecision on accepting digital assets has caused thousands of developers, YouTubers, startups, investors and traders to leave India for more regulatory-friendly countries like Dubai or El Salvador. According to a recent According to a report, Dubai DMCC Free Zone said that 16% of new companies registered in the first quarter of 2022 are cryptocurrency and blockchain companies. Millions of talented young Indians are leaving India in search of better opportunities. Most countries are encouraging the development of Web3, metaverse and blockchain.”
Although the Indian government has pledged to submit a draft cryptocurrency bill since 2018, it has failed to do so. At the same time, it hastily enacted new crypto tax laws in two months, largely inspired by the country’s gaming laws. The Indian government failed to listen to stakeholders in the cryptocurrency ecosystem, and the disastrous effects were visible in the first month.
In March, Polygon co-founder Sandeep Nailwal warned of a potential brain drain in the crypto space. He said at the time that the Indian government’s approach to the crypto industry would definitely lead to a crazy brain drain:
“I want to live in India and drive the Web3 ecosystem. But in general, the regulatory uncertainty and the size of Polygon, it’s not a good idea for us or any team to expose their protocol to local risks meaningful."
Nischal Shetty, founder of cryptocurrency exchange WazirX, which has reportedly moved its headquarters to Dubai, shared similar concerns with Cointelegraph:
“The challenges facing cryptocurrency investors today could create a host of headwinds for the entire system. It could also lead traders to trade on peer-to-peer exchanges rather than on Indian exchanges that comply with know-your-customer (KYC) regulations .It will also cause the government to lose tax revenue.In this unfavorable situation, we will see more and more cryptocurrency and Web3 startups moving overseas.We must stop talent by introducing more favorable and specific policies Churn, help us succeed in India."
Is there a solution?
The Reserve Bank of India is currently the biggest advocate for a blanket ban on the use of cryptocurrencies, while many ministers in the current government have called for higher crypto taxes on the grounds that cryptocurrencies are often used for illicit activities. Judging by the current position of the government and the ministry responsible for developing cryptocurrency regulations, there is little hope of a change in position until the government realizes the harm its policies have caused. Most of the cryptocurrency platforms in India may have moved.
A major concern of Indian ministers appears to be the use of cryptocurrencies for illicit activities. However, this claim has been debunked several times over the past few years, with Chainalysis’ latest report revealing that cryptocurrencies used for illicit activity have dropped to less than 1% of the total circulating supply.
What is needed is a strong encryption framework, and the Indian government can take inspiration from its Asian counterparts such as Thailand and Malaysia. Thailand has scrapped an earlier proposal to introduce a 15% cryptocurrency tax on capital gains and also exempted traders from value-added tax on regulated exchanges in an effort to promote cryptocurrency usage. The Indian government will have to act quickly to undo the damage. Otherwise, it will be a bystander on the Web3 track.
Mohammed Danish, Chief Legal Officer of cryptocurrency exchange BitDrive, concluded: “While India is leading the way in producing some very talented builders in the Web3 space, bringing enormous value to the global industry, unfortunately due to the Vague regulatory policies for activities involving the use of cryptocurrencies, which have failed to provide an enabling environment for Web3 projects.”
“The recent move to cut off retail payments on cryptocurrency exchanges is a new example, causing trading volumes on some platforms to plummet. There is no legal basis for denying payment access to exchanges. This unexpected and unreasonable behavior has also prompted the Web3 project Shifting their bases to more liberal jurisdictions such as Dubai, Singapore, Portugal and others. In its best interest, the Indian government urgently needs to take corrective measures to stop this brain drain.”
Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness.
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