The introduction of a new crypto tax in India (even though is just 1%) has caused the maximum outflow of traders from the country, thus, threatening the sustainability of four major exchanges in the country.
New Government Regulations
The Indian government has introduced a new 1% tax on crypto transactions in an attempt to obtain extra revenues under the current market conditions. From a broader perspective, this government measure is a logical consequence of the earlier fiscal policy aimed at increasing the tax burden on crypto traders. Thus, a new 30% tax on income from investments in cryptocurrencies has become active since February. Moreover, the option of offsetting losses is removed, thus treating them differently from stocks and bonds. As a result, such regulations make it highly problematic for traders to achieve profitable performance under such conditions.
Contrary to the government’s expectations, the actual effects of such policies and new requirements appeared to be the opposite. The expected profitability of crypto trading operations declined significantly, especially for crypto traders specialized in high-frequency trading.
The major national exchanges ZebPay, WazirX, Giottus, and CoinDCX suffered a decline in users’ activity between 60% and 87% immediately after the implementation of the new policy by the government. Traders tend to migrate to exchanges under other governments’ jurisdictions or rely on decentralized exchanges and peer-to-peer trading when completing their transactions.
The current crisis in the crypto market and the high volatility in the past few weeks create additional difficulties for crypto traders in terms of generating profits. The new regulations introduced by the Indian government decrease the opportunities for profitable trading even further.
Those traders who follow short-term strategies tend to be especially flexible in adjusting their exchange choices because such innovations, even though they appear to increase the tax rates by 1 percentage point, tend to result in considerable losses. Moreover, traders also have to consider the earlier taxes introduced as well as the balance of potential gains and risks associated with each alternative.
Implications for Indian and Foreign Traders
Indian traders are likely to become even more responsive to the conditions offered by different exchanges in various jurisdictions. The major short-term effect will refer to the wider utilization of decentralized exchanges that offer both lower fees and higher anonymity.
Also, considering the currently widespread problems observed in many lending protocols and centralized exchanges, the options of decentralized exchanges tend to become even more appealing for the majority of traders. Some long-term traders may continue to utilize Indian exchanges for some time as they are affected by such tax increases to a lower degree. In contrast, intraday traders may have to make urgent adjustments to preserve their profitable operations.
As the Indian market is one of the largest in the world, the current crisis may also affect traders worldwide. They will have to reconsider their current investment plans and become more responsive to the major regulatory challenges. In addition to the traditional fees charged by all exchanges, they also have to evaluate the risks of tax changes made in various countries.
For this reason, the further development of peer-to-peer transactions and DEX options may become much more active even in other regions of the world. Moreover, the simultaneous participation in trading operations in several exchanges may become more reasonable under such conditions.
Implications for the Indian Government
The highly negative outcomes of the Indian government initiative confirm that the attempts to increase government revenues by introducing new taxes have proved to be unsuccessful. The demand for exchange services from traders is highly flexible to regulatory measures used by the government.
Under the present market conditions, the margin of traders’ profits has become extremely narrow, thus, forcing them to seek other alternatives that can offer similar services at lower fees. For this reason, the Indian government may have to reconsider its policies in order to preserve the strong position of the national crypto exchange market.
The reduction or abolishing of the newly introduced taxes may be one of the most urgent measures required for improving the comparative positions of the Indian crypto segment as compared with other jurisdictions in the following months.
The Indian case may also be relevant for governments from both developed and developing countries. The reason is that the regulatory policies should become more flexible and extend much beyond the imposition of new crypto taxes.