According to a new report, India's tax rules have resulted in local exchanges giving the lion's share of the market to foreign players.
Esya, a New Delhi-based think tank, said that foreign exchanges commanded 67.6% of the market share in India.
$3.8 billion of trading volume shifted from domestic centralized exchanges to those operated offshore during the period between February and October of last year.
Esya said that the Indian exchanges lost 81% of their trading volume in four months.
India is one of the countries that has a strict approach to cryptocurrencies. It began taxing virtual currency in April of last year, with a 30% tax on the gains and a 1% deduction on each transaction.
According to the report, traders are moving to foreign exchanges because they think they will be able to hide their activities. Users of foreign exchanges can avoid making transactions to a business by using peer-to-Peer on-ramps.
Foreign exchanges such as KuCoin and Gate allow trading within a capital limit of a few thousand dollars a day. KYC is not required for decentralized exchanges. India's tax regime will force users to switch to unregulated entities.
Esya wrote that India is not only losing out on international competitiveness in the VDA, which is closely linked to several emerging technologies, but also on scarce Liquidity which is important for concurrent economic value creation in the country.
The implications of the VDA architecture on the government's tax revenue are not known.
The report suggests that the Indian government should at least waive the 1% tax on transactions.
Local authorities are some of the most vocal opponents of the digital currency. The governor of the Indian central bank warned last month that the next financial crisis could be caused by private cryptocurrencies.
The central bank said last week that India, under its ongoing G20 presidency, will prioritize the development of a framework for global regulation of unbackedcryptocurrencies.
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