Offshore exchanges gain ground as domestic platforms and tax revenues face growing pressure

New Delhi: In December 2025, the Government of India acknowledged in Parliament that certain offshore crypto exchanges providing services to Indian users were failing to comply with TDS obligations under the Income Tax Act. This statement came close to four years after the 1% TDS on crypto transactions was introduced in the 2022 Union Budget, a move aimed at enhancing monitoring of the crypto ecosystem while discouraging speculative investment. The acknowledgement indicates that the policy has not met its intended goals and has instead triggered unintended effects.

Available evidence shows that a large share of Indian users moved to offshore exchanges that did not deduct TDS. Estimates suggest that tax authorities have lost nearly ₹11,000 crore in uncollected TDS, while Indian users generated close to ₹5 lakh crore in trading volumes on offshore platforms between October 2024 and 2025, according to a recent study. Earlier studies by the Esya Centre and the Centre for Tax Laws at the National Academy of Legal Studies and Research reported similar outcomes, with the most notable finding being that nearly 90% of Indian crypto trading volume shifted offshore after the government introduced the TDS regime in 2022.

These developments clearly show that TDS did not deter users from investing in crypto assets. Instead, it pushed them away from domestic exchanges that complied with Indian regulations and towards offshore platforms that chose not to. These offshore exchanges neither deducted TDS nor reported transactions, which significantly reduced the government’s visibility into trading activity. Authorities blocked several such platforms for failing to comply with the Prevention of Money Laundering Act, which requires registration with FIU-India. Although some of these exchanges later returned after paying penalties and completing registration, they continued to operate outside the taxation framework. As a result, India now effectively has two distinct categories of crypto service providers.

Offshore platforms operate with limited transparency and without a physical presence in India, which severely constrains the government’s ability to supervise them. This lack of oversight has unsurprisingly allowed several such exchanges to facilitate illicit transactions. Regulatory arbitrage on offshore platforms has therefore diverted users not only from domestic exchanges but also from the government’s own monitoring ecosystem.

The government has repeatedly stated that effective regulation of the virtual digital asset sector requires strong international cooperation to reduce regulatory arbitrage. However, the current regulatory vacuum harms all stakeholders. Compliant domestic businesses lose users, the government loses revenue and supervisory control, and Indian users face exposure to high-risk and largely unsupervised platforms that offer little or no consumer protection or grievance redressal. Given that India has the largest number of crypto users globally, protecting their interests must remain a priority. The present environment, which exposes users to heightened risks with limited avenues for mitigation, is untenable.

The government’s acknowledgement that offshore exchanges operate outside the regulatory perimeter marks a positive step and reflects closer scrutiny of the sector. However, recognition alone is insufficient. The government must now enforce uniform compliance obligations on all crypto exchanges serving Indian users, regardless of where they are domiciled. Such action would eliminate regulatory arbitrage, correct competitive distortions, expand the tax base, improve revenue collection, and strengthen supervisory oversight. Ultimately, these measures would safeguard consumer interests and serve the country’s broader economic and regulatory objectives.