India's Web3 Industry Seeks Relief From 1% TDS To Spur Growth

India is on the cusp of becoming a digital superpower. But a single policy move—1% Tax Deducted at Source (TDS) on cryptocurrency transactions—is clouding the country's Web3 aspirations. It was announced in April 2022 with a flat rate of capital gains tax of 30%. The 1% TDS has ancillary effects in so far as it has brought the country's nascent crypto market to a standstill.

More than 90% of crypto volumes have moved to offshore exchanges since the taxation, according to crypto leaders. Local platforms, which were earlier bustling with activity from users, are now running on considerably lower liquidity and eroding investor confidence. What was meant to bring in regulatory clarity has instead taken India's Web3 ecosystem to the edge.

Volume Down, Migration Up

The effect has been swift and far-reaching. Indian exchanges have seen plummeting volumes of trade, while global exchanges have seen hordes of new Indian users. Startups and developers—hitherto keen to innovate and develop locally—are relocating bases to more welcoming jurisdictions such as Singapore and Dubai, attracted by more lenient tax and regulatory environments.

One of the major concerns of the stakeholders is the absence of loss offset provisions. Investors in traditional asset classes such as equities have the option to set off gains against losses and roll them forward. Crypto investors in India do not have this privilege, which is making investment risk disproportionately high. Honest, tax-paying players are therefore exiting or fleeing.

This change has made the government of India less sensitive to crypto transactions. Exchanges within the country that adhered to KYC and compliance regulations are now priced out by overseas exchanges that have less regulation, possibly making the market unsustainable for the TDS to begin with.

The Global Shift—and India's Pause

With India inching closer cautiously, the global picture for digital currencies is shifting. Ranging from tokenization of real-world assets to central banks experimenting with digital money, crypto and blockchain tech is gaining momentum. Political endorsement by influential personalities such as Donald Trump, who has openly contributed to the growth of crypto, is also bringing the sector more legitimacy on the global stage.

These are milestones, lament the leaders of India's cryptocurrency fraternity, that mirror the widening chasm between worldwide adoption and Indian policy lag. Unless there is a timely policy overhaul, India could be losing a golden opportunity to take the leadership role in the next digital innovation wave.

Inside Discussions and Hope for Reform

While the Union Budget 2025 did not refer to any particular crypto policy amendments, it is said that industry players and bureaucrats are in discussions. There is a concerted industry effort to reduce the TDS to 0.1% from 1%, which most agree would find the optimal trade-off between regulation and market sustainability.

Also emerging is support for taxing capital gains on cryptocurrency at the same rate as other asset classes. Existing tax regimes distinguish not at all among crypto gains by duration held, compared to equity investment that has differential taxation of short-term and long-term gains.

Lack of provisions for set-off and carry-forward makes the tax burden even heavier for Indian crypto investors, which is one of the world's toughest regimes. That is a big deterrent for retail as well as institutional involvement, according to several insiders.

The ₹15 Trillion Opportunity

In spite of the obstacles, crypto investors are optimistic that India's digital economy for assets can be developed. Estimated projections show that with regulatory reforms, the Indian crypto market valued at $2.5 billion today can expand to $15 billion in 2035.

This expansion would not only add to market capitalization but also generate jobs, bring in foreign direct investment, and consolidate India's role in blockchain and Web3 technology. Ease of entry and regulation could see trading volumes pick up again, keep startups local, and make India a center of crypto innovation again.

What's Next?

While no deadline has been set, expectations are that the government will reconsider its stance in the face of declining domestic adoption and foregone market opportunity.

India's Web3 space is at a critical juncture. With appropriate tax reforms—beginning with the cut in the 1% TDS—India can release maximum value and innovation. Otherwise, India will forfeit its crypto future to outside investors.