Over the following months, everyone from investors to influencers, YouTubers, sharing platforms, and even educational startups were busy suggesting tips and tricks for avoiding these taxes, or going out of business entirely.
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Between April 2022 and July 2023, it is estimated that cryptocurrency trading volumes in indian exchanges fell from a high of $6 billion a month to just a few million, as a large portion
moved to marine platforms.
Now cut to December 2023, and the Ministry of Finance has issued notices to nine offshore platforms for non-compliance with the Prevention of Money laundering Act (PMLA), while the IT Ministry blocked access to the URLs and mobile applications of these nine entities: binance, Kucoin, Huobi, OKX, Gate.io, Bittrex, Bitstamp, MEXC Global and Bitfinex. This meant that Indian crypto exchange platforms could finally breathe a sigh of relief.
Last month, these platforms, including CoinDCX, CoinSwitch, Unocoin and BuyUcoin โ witnessed a massive increase, ranging from 100% to 2000% in registrations and deposits, as investors feared losing their foreign assets. To further leverage the opportunity, Indian platforms announced deposit offers and cashbacks of up to two%.
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CoinDCX alone announced a sum of $1 million to be disbursed as an incentive to depositors.
All of which seems to suggest that winter is finally receding. But can we expect the market to skyrocket again like before? And what about foreign companies like Binance? Will they be able to return? Or would they choose to operate from tax havens such as the British Virgin Islands, Seychelles and the Cayman Islands?
early shoots
So far we have seen early signs of recovery with Indian stock markets reporting an increase in volumes during the month of January. However, almost $4 billion worth of crypto assets held by Indian investors are believed to be deposited in foreign wallets, of which only a few million have returned.
โIt has been a really encouraging increase in deposits, which gives us confidence that investors want to trade on secure and compliant exchanges,โ said Minal Thukral, Executive Vice President and Head of Growth and Strategy at CoinDCX. "We are optimistic that almost 50% of foreign assets will return to India along with new investments in Bitcoin ETFs, which build confidence in crypto as an asset class.โ
But although it is true that the crypto freeze has been thawing in recent weeks, experts say there is still much to do. Despite banning non-compliant foreign cryptocurrency exchanges, for example, trading on these platforms is active thanks to pre-installed apps and VPNs. This also makes the ban ineffective and keeps most of these assets still outside the scope of the law.
โSome Internet service providers have not yet blocked access to these websites, which means users can still access them through their own WiFi providers,โ said Aditya, a cryptocurrency influencer and watcher.
โTrading is also done through apps installed before the ban and also through VPN. But such access is prone to malicious attacks and can lead to the theft of users' assets.โ
A VPN is a connection setup with a remote network by changing the IP address to access information that is not available on the home network. While VPN activity cannot be tracked to estimate the volume of these exchanges, so far it appears that Indians are reluctant to withdraw their foreign property due to high taxes in India.
โFor cryptocurrency investors, there are multiple avenues to bypass URL blocks. Apart from VPNs, they can also transact with others on a peer-to-peer (p2p) basis, without the involvement of intermediaries such as cryptocurrency exchanges and depository institutions,โ said Vivan Sharan, partner at political advisory firm Koan Advisory.
"A recent study highlights that 90% of the total cryptocurrency trading volume carried out by Indians was done p2p between July 2022 and July 2023. Therefore, blocking the URLs of some exchanges will not automatically widen the regulatory net of India," he added. But how long investors will be able to stick to these alternative practices is a question we don't yet know the answer to.
Return expectations
Experts have also pointed out Binance's silence on the ban and believe that these platforms do not have a business case in registering as compliant entities with the Financial Intelligence Unit (FIU) in India.
Registration with the FIU acts as a license to operate as a virtual digital asset (VDA) exchange in India.
โThese platforms have not been compliant for over a year despite the Indian government sending them several notices. Only after the ban was India taken seriously,โ said Sathvik Vishwanath, CEO and co-founder of Indian exchange Unocoin.
"Institutional investors always have the option of trading through their foreign entities to avoid this tax," he added. โAs for retail investors, they only represent three to five percent of the overall Binance user base. In fact, once you arrive in India and start paying taxes, this figure can drop further to one%. So does it make sense for them to take on this operational and compliance burden?โ
Furthermore, not only is the crypto investor community in India small, but offshore platforms also have to worry about retrospective taxes of nearly Rs 3,500 crore for transactions that have occurred in the last year and a half.
According to a study by research firm Esya Centre, Indians traded more than Rs 3,500,000 crore worth of offshore platforms, which is more than 90% of the total VDAs traded by Indians.
This has deprived the exchequer of revenue worth Rs 3,493 crore, against the collected revenue of Rs 258 crore, due to non-TDS compliant offshore operations. Additionally, this would also mean that billions of dollars in capital gains taxes would not be collected on these foreign transactions. And this doesn't even take into account private transactions or larger over-the-counter transactions.
"The ban is done under the PMLA law, but if these exchanges decide to register as a UIF entity, the Income Tax department can scrutinize them for past transactions on which no taxes have been paid," said Stella Joseph, partner from Economic Law Partners. .
More than taxes, these entities should also be concerned about PMLA compliance as the Enforcement Directorate has reportedly found cryptocurrencies to be a money laundering vehicle in several cases, including the gambling scam. Mahadev app.
"It's really a matter of intent," said Balaji Srihari, chief trading officer at Indian exchange CoinSwitch. "India is a big market for cryptocurrency investments, but if foreign platforms want to take advantage of this opportunity, they must comply with the country's law, be it data protection, taxation or anti-money laundering."
