Why are Indian crypto firms making a beeline for Dubai?

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Lured by a favourable regulatory landscape, an increasing number of Indian crypto companies are relocating to Dubai in an attempt to evade the high tax regime in their home country.

Crypto analysts see the exodus as a reaction to the stringent tax rules and ambiguous legal guidelines for digital currencies in India. In June 2022, the government introduced a 30 per cent tax on cryptocurrency trading profits and one per cent tax on transactions exceeding Rs10,000.

Juxtaposed with the harsh crypto ecosystem, low taxes, ease of business establishment, and dedicated regulatory framework for digital assets make the UAE, Middle East’s prime financial hub, an attractive destination for crypto firms. Dubai, in particular, excelled as a crypto innovation centre, thanks to strategic policies, and a supportive regulatory environment, crypt strategists said.

“A lot of Web3 founders prefer Dubai or Singapore as their hub because they have clarity and certainty around regulations and greater community support. When you’re setting up a business, investors are more comfortable investing in a jurisdiction where there are no last minute surprises. I am starting to see this trend on the ground and it must be reversed,” Sumit Gupta, CEO of CoinDCX, was quoted as saying by the media.

“We have seen a decline of more than 90 per cent in volumes. That’s a huge, steep decline. And what you have seen is that India continues to be number one when it comes to grassroots crypto adoption, but a lot of that activity is happening on alternative channels because of the high tax rates,” he said.

On top of 30 per cent tax plus applicable surcharge, India introduced four per cent cess on profits made from crypto trading. Last year, Indian crypto traders faced the introduction of a one per cent tax deducted at source on crypto transactions above Rs10,000. According to an amendment to the Income Tax Act, failure to pay TDS may result in a penalty equal to the unpaid amount, a 15 per cent interest on late payments and in certain cases even a jail sentence.

The UAE has been proactive in creating a regulatory environment that is both robust and flexible. Over the past three years, Dubai and Abu Dhabi have been driving most change by supercharging regulatory efforts to attract a global set of businesses focusing on digital assets, bringing significant talent, investment, and positive exposure to the region, crypto market experts said.

Dubai’s appeal as a crypto hub is fast growing because of its liberal initiatives in providing regulatory clarity with the launch of the Virtual Assets Regulatory Authority (Vara), putting out guidelines and policies about licenses to get. Businesses are coming in, predominantly from the UK, India, China, the US, Russia. Vara oversees cryptocurrencies and related activities in all free zones in Dubai except the Dubai International Financial Centre (DIFC). Abu Dhabi has a similar scope of work through the Abu Dhabi Global Market.

DIFC’’s independent regulatory authority, the Dubai Financial Services Authority, has been proactive in developing a regulatory framework that balances risk with innovation. DIFC has proposed to enact a new Digital Assets Law and new Law of Security regime, working closely with industry participants “to set out legal characteristics of digital assets, its proprietary nature, how it may be controlled, transferred, and dealt with by interested parties.”

The Dubai Multi Commodities Centre (DMCC), which houses over 23,000 companies, has a dedicated Crypto Centre featuring 550 Web3 companies out of which 50 are Indian.

Dubai also has gone out of its way to attract top crypto talent. The Dubai World Trade Centre has become a dedicated free zone for regulated virtual asset businesses. The specialised zone for virtual asset businesses allows for: foreign ownership; zero corporate tax; business start-up packages; co-working and office spaces, and access to a community of over 1,400 companies.

According to Chainalysis, the Middle East and Africa region has become the sixth largest crypto economy with an estimated $400 billion or 7.2 per cent of global transaction volume recorded between July 2022 and June 2023.