A study by New Delhi-based think tank Esya Centre has estimated a shift of cumulative trade volume of around $3,852 million (approx Rs 32,000 crore) from domestic virtual digital asset exchanges to foreign ones during the February-October 2022 period following the government’s decision to impose a tax.

Of this, a cumulative volume of Rs 25,300 crore was offshored during the first six months of the ongoing financial year.

In the last budget, the government had imposed a levy of a 30 per cent on virtual digital assets, which include cryptocurrencies, on any trade applicable from April 1, 2022; a levy of 1 per cent tax deducted at source on transactions above Rs 10,000 from July 1; and the provisions disallowing the offsetting of losses applicable from April 1.

“We find that the main (unintended) impact of the policy is the offshoring of domestic business and liquidity to foreign exchanges,” Esya Centresaid in its report.

The think tank has recommended that the government should consider lowering the TDS rates to curb its distortionary effects since any rate of TDS can meet the transaction tracking purpose.

“TDS levels can be analogous to those of the securities transaction tax (STT). The STT is levied at 0.01 per cent, 0.1 per cent or 0.05 per cent depending on the nature of the instrument. The STT has set a successful precedent as it has been generating about Rs 22,000 crore in tax revenues every year,” the report said.

It has further recommended that the government should gather evidence on the optimal tax rate for the VDA market to improve the overall contribution of VDA ecosystem.

“The Laffer curve depicts the relationship between rates of taxation and the resulting levels of tax revenue. It is important to conduct pilots to ascertain this optimal tax structure on the Laffer Curve for the market,” the report said.