Crypto regulation in India: CBDT asks stakeholders on regulation, compliance; VDA oversight, tax-compliance in focus

Apex taxation authority has inquired with cryptocurrency stakeholders about the necessity of new virtual digital assets (VDA) legislation, its administrative oversight, and the impact of current tax policies on trade migration.

The Central Board of Direct Taxes (CBDT) has also sought feedback regarding the 1% tax-deducted-at-source (TDS) rate, potential adjustments, and the possibility of loss offsetting for traders, as reported by Economic times report.These comprehensive inquiries have raised optimism within the cryptocurrency sector, which has faced challenges from stringent taxation, regulatory uncertainty, and the Reserve Bank of India's cautious stance towards cryptocurrencies.Currently, cryptocurrency profits face a 30% tax rate, unlike the lower capital gains tax applicable to equities. Traders cannot balance profits against losses for tax reduction. Many traditional banks hesitate to facilitate crypto transactions due to central bank concerns. Additionally, regulations under RBI and FEMA lack clarity regarding residents' participation in overseas cryptocurrency platforms.

These regulatory constraints have prompted numerous significant crypto investors to relocate their operations to Dubai, which aims to establish itself as a global cryptocurrency hubIndia might revise its approach, considering cryptocurrency adoption in developed markets and digital currencies' emergence as investment vehicles and underlying assets for US mutual funds. "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," said Purushottam Anand, advocate and founder of Crypto Legal, a blockchain and crypto-focused law firm, quoted by ET.With China remaining the sole major economy enforcing a complete prohibition, global consensus favours regulation over prohibition, according to Anand.

Queries by CBDT

CBDT's data analytics cell requested platforms to submit their perspectives by mid-August. Accordin to ET, the specific queries included:(a) Do you think the current VDA regulation in India is adequate or a comprehensive VDA law is required and the agency which you consider should be authorised to administer it (e.g, Sebi, RBI, MeitY, FIU-IND)?(b) What percentage of trading volumes has moved offshore, and under what circumstances (eg tax concerns, regulation, liquidity)? Which are the jurisdictions where users/businesses are shifting?(c) How would you compare India's VDA tax framework with major jurisdictions?(d) Have you observed any market impact due to the disallowance of loss set-off or carry-forward? In your view, how has the 30% flat tax affected volumes, liquidity etc?(e) What is the biggest challenge in implementing the TDS-identifying counterparty's residency status, calculating the market value of VDA, handling peer-to-peer transactions, or reporting to the income tax department's centralised processing centre?(f) Should there be different TDS treatment for market makers, or retail or institutional transactions?(g) What measures could be considered to ensure a level playing field between domestic and offshore VDA exchanges, particularly in relation to tax compliance for Indian customers?Some exchanges, within the past two years, have introduced derivative products like crypto futures and options with reduced TDS impact. CBDT seeks clarification regarding derivatives, cross-border transactions, and VDA definition. Platforms must also address their readiness for OECD's crypto-asset reporting framework (CARF), designed to combat tax evasion and money-laundering.