Budget 2025: Can India’s VDA Tax and regulatory reforms contribute to the nation’s economic growth?
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Yet, despite India's leadership in VDA adoption, there are challenges that are hindering the sector’s long-term growth and its potential to drive economic progress. One of the most pressing issues is the outflow of capital due to the current taxation framework. The introduction of a 1% Tax Deducted at Source (TDS) on VDA transactions has, ironically, enticed users to move their trading activities to offshore platforms. Over 90% of VDA trading volume, amounting to INR 600,000 crore, now occurs outside India's tax jurisdiction, depriving the government of critical tax revenue.
The current taxation model, though, was designed to monitor VDA transactions, it has inadvertently driven traders away from Indian exchanges. High-frequency traders, who are essential for market liquidity, are especially impacted. Without them, India risks stifling market growth and innovation. Furthermore, the hefty 30% capital gains tax, combined with the disallowance of offsetting and carrying forward losses from the sale of VDAs, further discourages them from using compliant Indian platforms. Moreover, users flocking to offshore platforms are exposed to risks such as fraud, lack of investor protection, and diminished market transparency. This double whammy of heavy taxation and losing business is driving down engagement on the Indian platforms, and indirectly promoting non-compliant and dangerous ways of investing.
India’s challenges with crypto taxation are reminiscent of past economic missteps. Historically, high customs duties on gold imports fuelled
