Mumbai: Crypto Traders in India Face Scrutiny from Tax Authorities
Many Indians trading on the world’s largest crypto exchange, Binance, are currently under the scrutiny of tax authorities. Over the past few weeks, the Income Tax (I-T) department has inquired whether the 1% tax deducted at source (TDS) on crypto transactions has been collected. According to notices served by the tax office, local investors must either provide proof of TDS deduction or submit documentary evidence explaining why TDS is not applicable to them.
Probing into Transactions
The department is investigating the source of funds used by traders, requesting their I-T returns for the years when these funds were earned. Some scrutiny notices have questioned transaction data downloaded from the offshore exchange’s website, imposing a 30% tax on the entire turnover instead of taxing only the gains.
Tax Evasion Alert
Many traders attempt to avoid TDS on foreign platforms, often unaware that both P2P and swap deals are also subject to TDS. Since the 2020-21 financial year, many crypto traders have moved their holdings offshore, partly by withdrawing assets from local exchanges. However, in the last 18 months, local exchanges have made it more challenging to withdraw funds, raising concerns among traders.
If the revenue department broadens its investigation, it could significantly impact Indians who have transferred their crypto holdings to wallets on overseas platforms like Binance. Some individuals who have become NRIs or migrated abroad have also transferred their crypto wealth from local exchanges to foreign platforms and private wallets under the pretense of legitimate reasons.
Industry Opinions
Vikram Subburaj, founder and CEO of Giottus, a domestic cryptocurrency exchange, commented, “This was bound to happen sooner or later. Overseas exchanges that bypass TDS requirements are putting Indian traders in a difficult position. If you want to serve investors in India, you should respect and follow the law of the land.
A considerable number of transactions by Indians on Binance involve peer-to-peer (P2P) deals, where the platform connects buyers and sellers who settle the transactions in rupees. However, traders may sometimes ignore the requirement that buyers must withhold TDS on direct P2P deals and transactions on foreign exchanges. This is in contrast to trades on domestic platforms, where exchanges handle TDS deductions and submission to the government.
Moreover, crypto swaps—frequently executed on foreign exchanges—bring TDS obligations for both buyers and sellers.
Regulatory Concerns
For over a year, local exchanges have tightened rules on crypto withdrawals amid concerns of money laundering. Once traders withdraw their cryptocurrencies from local wallets, they can move them to private wallets, sell them abroad, or swap them for other coins. Such activities may violate foreign exchange regulations and raise alarms about illegal use of cryptocurrencies.
Ashish Karundia, founder of CA firm Ashish Karundia & Co, stated, “Many cybercrime cases involve transactions in Virtual Digital Assets (VDAs) to preserve anonymity. These transactions between Indian and foreign wallets may potentially run afoul of India’s foreign exchange regulations and anti-money laundering laws.” He emphasizes the need for the government to create comprehensive guidelines for scrutinizing suspicious VDA transactions.
The Challenge of Anonymity
Traders who can withdraw their cryptocurrencies from local exchanges may trade them for privacy coins like Monero or Zcash, which are difficult to track and not available on local exchanges. Unlike well-known coins like Bitcoin, which operate on transparent blockchain networks, these privacy coins are designed to operate without leaving a trace.
Amid high taxes and banks distancing themselves from crypto payments, traders have increasingly turned to foreign exchanges. Note that crypto transactions became subject to TDS starting July 2022. In addition to the steep 1% TDS imposed on every sale, crypto gains are taxed at the full income tax rate. This contrasts with stock profits, which are subject to capital gains tax, and traders are not permitted to offset crypto gains against losses, exacerbating their tax liabilities.