India’s primary tax authority, the Central Board of Direct Taxes (CBDT), is actively seeking input from stakeholders in the cryptocurrency industry. The CBDT is investigating the potential need for revised regulations governing Virtual Digital Assets (VDAs), exploring effective administrative oversight strategies, and assessing how current tax policies may be influencing the movement of cryptocurrency trading activities.
The CBDT’s inquiries also extend to the existing 1% Tax Deducted at Source (TDS) rate applied to crypto transactions. The board is considering potential adjustments to this rate and evaluating the feasibility of allowing traders to offset losses against profits for tax purposes, according to a report by the Economic Times.
These proactive investigations have sparked optimism within the crypto community. The sector has experienced challenges stemming from high taxation, unclear regulatory guidelines, and the cautious perspective of the Reserve Bank of India regarding digital currencies.
Currently, profits from cryptocurrency investments are subject to a 30% tax rate, a higher rate compared to the capital gains tax applied to traditional equities. Furthermore, crypto traders are unable to deduct losses from their profits to reduce their tax burden. The apprehension of the central bank also leads many established banking institutions to hesitate in facilitating cryptocurrency-related transactions. Furthermore, the regulatory framework under the RBI and the Foreign Exchange Management Act (FEMA) lacks explicit guidance regarding the participation of Indian residents in international cryptocurrency platforms.
These regulatory challenges have spurred some prominent cryptocurrency investors and businesses to relocate their operations to jurisdictions like Dubai, which is actively positioning itself as a leading global hub for cryptocurrency innovation.
India may be considering a change in its approach to cryptocurrency, taking into account the increasing adoption of digital currencies in developed nations and the evolution of cryptocurrencies as investment vehicles and underlying assets for mutual funds in the United States. Purushottam Anand, an advocate and founder of Crypto Legal, a law firm specializing in blockchain and crypto-related matters, told ET, “Considering the G20 Synthesis Paper, Finance Track Communique, and the recent Parliamentary Standing Committee on Finance announcement selecting VDAs for a detailed examination this year, it is likely that the government will introduce a comprehensive VDA regulation. India has consistently emphasised that regulation or banning can be effective only with significant international collaboration.”
Anand further noted that with China being the only major economy enforcing a total ban on cryptocurrencies, the global consensus leans towards regulation rather than outright prohibition.
CBDT Seeks Information
The CBDT’s data analytics division has requested crypto platforms to submit their insights and perspectives by mid-August, as reported by ET. The key inquiries include:
(a) Is the current VDA regulatory framework in India sufficient, or is a comprehensive VDA law necessary? Which agency should be responsible for administering it (e.g., SEBI, RBI, MeitY, FIU-IND)?
(b) What percentage of trading volume has shifted offshore, and under what circumstances (e.g., tax concerns, regulation, liquidity)? Which jurisdictions are attracting users/businesses?
(c) How does India’s VDA tax framework compare to those of other major jurisdictions?
(d) Have you observed any market impact due to the disallowance of loss set-off or carry-forward? How has the 30% flat tax affected trading volumes and liquidity?
(e) What is the most significant challenge in implementing TDS – identifying the counterparty’s residency status, calculating the market value of VDAs, handling peer-to-peer transactions, or reporting to the income tax department’s centralized processing center?
(f) Should market makers, retail investors, and institutional investors be subject to different TDS treatment?
(g) What measures could be implemented to ensure a level playing field between domestic and offshore VDA exchanges, particularly regarding tax compliance for Indian customers?
Recently, some exchanges have introduced derivative products like crypto futures and options, which may have a reduced TDS impact. The CBDT is seeking clarification on the treatment of derivatives, cross-border transactions, and the definition of VDAs. Platforms must also demonstrate their readiness for the OECD’s Crypto-Asset Reporting Framework (CARF), which aims to combat tax evasion and money laundering.