Indian Crypto Body Urges Action Against Offshore Entities: Web3 & Local Crypto Update

• Offshore Exchanges Given Ultimatum by Indian Government
• Details of the Show Cause Notice
• Recent Legal Measures and Implications
• Impact on Local and Offshore Exchanges
• Consequences of Tax Deduction at Source (TDS)
• BWA's Additional Requests
• Withdrawal Period for Indian Retailers

Offshore Exchanges Given Ultimatum by Indian Government

Rajagopal Menon, Vice President of prestigious Indian crypto exchange WazirX, has stated, All we are asking for is a level playing field, in response to the recent actions of the Indian government. Following the receipt of a formal request by the Indian crypto and Web3 association's advocacy body, the government decided to block the URLs of nine offshore exchanges and issued them show cause notices.

Details of the Show Cause Notice

As part of the show cause notice, the offshore exchanges have been given a two-week deadline to explain why no action should be taken against them. The request for this notice was made in a letter dated December 16th written by Bharat Web3 Association's (BWA) Chairman, Dilip Chenoy, addressed to the Sanjay Malhotra, Secretary of the Department of Revenue in the Indian Finance Ministry.

Despite the two-week deadline, the BWA's letter asked for a one-month grace period for offshore exchanges to register with India's Financial Intelligence Unit (FIU), a part of the Finance Ministry. However, it is currently unclear whether the BWA letter was solely responsible for the government's action or if the action would have been taken independently.

Recent Legal Measures and Implications

The FIU, the nation's anti-money laundering unit, became a mandatory registration point for crypto businesses by the Indian Finance Ministry in March. This requirement was set under the Prevention of Money Laundering Act (PMLA), with 31 local entities having registered with the FIU since this legislation was put in place.

The nine exchanges involved are Binance, KuCoin, Huobi$2.62 -0.25%, Kraken, Gate$5.17 -0.37%.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex. There has been no response from these entities to comment requests during the holiday season. Similarly, no response has been garnered from BWA to comment requests.

Impact on Local and Offshore Exchanges

Such action from local crypto-related entities against foreign exchanges is rare, with local exchanges not previously requesting government action against offshore ones. This comes at a time when Indian crypto exchanges have been in survival mode, trying to extend their runways, in the wake of hefty taxes imposed on the industry, including a 30% tax on crypto profits and a 1% tax deducted at source (TDS) on all transactions.

Consequences of Tax Deduction at Source (TDS)

Research conducted by a think tank detailed how the TDS led to approximately 5 million Indian crypto traders moving their transactions offshore, costing the government an estimated $420 million in potential revenue since its introduction in July 2022. The study also revealed that Indians have moved more than $3.8 billion in trading volume from local to international crypto exchanges post the announcement of controversial crypto rules.

BWA's Additional Requests

The BWA's letter also included requests for the government to ask offshore exchanges to establish an Indian subsidiary or entity. It suggested the imperative depositing of the applicable TDS effective from when it was imposed on July 1, 2022, and recommended restricting access to non-compliant platforms on mobile app stores and blocking their IP addresses. It is unclear whether all these requests feature in the show cause notices.

Withdrawal Period for Indian Retailers

Significantly, the letter requested a 30-day withdrawal period for Indian retailers to withdraw their assets prior to implementing any restrictions. Rajagopal Menon, Vice President of WazirX said, We are focusing on the 1% TDS issue because that is what is affecting our business.

Sumit Gupta, the co-founder and CEO of CoinDCX, another leading crypto exchange, stated that Indian exchanges, led by BWA, have consistently advocated for a level playing field, particularly concerning investors migrating to offshore platforms. These platforms are not obligated to implement taxation and 1% TDS.

In conclusion, Gupta assured, FIU IND's recent steps toward offshore Virtual Digital Assets Service Providers (VDA SPs) will mitigate risks, protecting users and investors from potential scams and fostering the development of a secure VDA ecosystem.

Edited by Jonathan Stoker