India’s crypto tax regime is primarily based on two key sections of the Income Tax Act — Section 115BBH, which imposes a 30% tax on profits from virtual digital assets, and Section 194S, which mandates a 1% TDS (Tax Deducted at Source) on every crypto transaction.
This TDS is not just a collection tool but also a tracking mechanism, as every deduction is reflected in the taxpayer’s AIS/26AS report, helping authorities monitor transactions.
However, when Indian users trade on offshore platforms — which are neither registered in India nor deduct TDS — the government is unable to collect taxes or track transactions, leading to massive data and revenue gaps.
Offshore Platforms’ Loopholes and Indian Users’ Access
Since December 2023, the Financial Intelligence Unit (FIU-IND) has taken action against several non-compliant crypto exchanges and requested the Ministry of Electronics and IT (MeitY) to block their URLs.
Yet, Indian users continue to access these platforms easily via VPNs, mobile apps, and mirror sites.
These platforms often enable peer-to-peer (P2P) trading, where crypto assets are held in escrow, and payments are made directly between buyers and sellers through UPI or Paytm.
In this setup, exchanges shift the responsibility of TDS deduction onto users — allowing the platforms to evade legal accountability.
Over ₹6,000 Crore in Lost TDS Revenue
According to a report by Esya Centre, India has missed out on over ₹6,000 crore in TDS collections since the introduction of the crypto tax regime in July 2022.
Between December 2023 and October 2024 alone, the loss stood at ₹2,634 crore.
Although the FIU issued notices to nine major offshore exchanges and temporarily blocked some of them, VPN access and mobile applications have kept them operational.
In 2024, one major global exchange even registered with the FIU and paid a ₹18.82 crore penalty, yet it still hasn’t implemented automated 1% TDS deduction.
Lack of Coordination Between FIU and CBDT
While FIU-IND enforces compliance under the Prevention of Money Laundering Act (PMLA), the Central Board of Direct Taxes (CBDT) oversees TDS and income tax enforcement.
Without effective coordination between the two, the tax trail remains incomplete.
The 1% TDS isn’t merely a tax; it’s a data-tracking tool that records every crypto trade in the system.
Because offshore platforms don’t follow this rule, these transactions never appear in the AIS/26AS reports, leaving tax authorities unable to identify the actual income of traders.
The Need for Policy Reform
The current framework must clearly define that if either party in a P2P transaction is an Indian resident, the exchange should be held responsible for TDS deduction.
Additionally, lowering the TDS rate while strengthening transaction reporting systems could reduce user burden while improving government oversight.
From the ‘Shadow Market’ to Transparency
At present, offshore crypto exchanges remain highly attractive to Indian users due to their TDS-free and convenient trading environment.
As long as this loophole persists, India risks not only losing revenue but also compromising financial transparency.
All the necessary legal instruments — from PMLA registration to income tax amendments and MeitY’s monitoring powers — already exist.
What remains to be seen is how quickly the government brings this shadow market into the light.
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