India’s Stance on Cryptocurrency Regulation: An Overview
In a recent written response to the Lok Sabha, the Ministry of Finance of India confirmed that the country has yet to establish specific regulations governing cryptocurrencies or Virtual Digital Assets (VDAs). This announcement has sparked discussions about the future of digital currencies in India’s rapidly evolving financial landscape.
The Borderless Nature of Crypto
The government has emphasized the challenges posed by the “borderless” nature of crypto-assets. This characteristic makes it incredibly difficult to effectively govern using traditional domestic regulatory tools. The Ministry argued that any effective regulation must arise from international partnerships designed to prevent systematic arbitrage across global exchanges. This indicates a recognition of the need for a collaborative, multi-national approach to regulation, as local laws alone may be insufficient in managing the complexities of digital currencies.
Taxation Without Regulation
Despite the absence of a dedicated legislative framework, India has implemented certain taxation measures regarding VDAs. Notably, there is a 1% Tax Deducted at Source (TDS) on VDA transfers and a steep 30% tax on profits derived from crypto transactions. However, criticism arises as the broader ecosystem continues to function without comprehensive legislative guidelines, leading to concerns over transparency and oversight.
The Ministry’s admission of the lack of specific regulations is stark, especially in light of the fact that India’s crypto trade volumes reportedly surpassed USD 15 billion, according to industry estimates often referenced by lawmakers. Alarmingly, the government currently does not collect activity-level data on Indian users or exchanges, leaving a significant gap in understanding the domestic cryptocurrency landscape.
Enforcement Mechanisms in the Absence of Regulation
Despite the lack of formal regulations, several enforcement mechanisms have begun to take shape. The Central Board of Direct Taxes (CBDT) has revealed that extensive surveillance led to the discovery of ₹888.82 crore in unreported income linked to VDAs. Under its NUDGE campaign, the CBDT has sent over 44,000 notices to taxpayers who engaged in crypto trading but did not declare it in their Income Tax Returns. This indicates a clear strategy aimed at enhancing compliance even in the absence of specific laws.
Additionally, advanced data-analytics tools like Project Insight have been employed to cross-reference user disclosures with blockchain activities, marking a shift toward a more forensic approach to tax oversight in India’s burgeoning crypto sector.
Money Laundering Risks and Stringent Measures
The Enforcement Directorate (ED) has also taken an expansive view under the Prevention of Money Laundering Act (PMLA), revealing alarming figures about crime proceeds traced to VDAs. A staggering ₹4,189.89 crore was frozen or seized, with multiple arrests made in connection to money laundering cases linked to crypto. It’s important to note that the government has also invoked the Black Money Act and the Benami Property Transactions Act, thereby enabling action against both local and offshore holdings.
Regional Disparities in Compliance
A recent disclosure of national TDS figures has highlighted regional disparities in crypto compliance across India. A total of ₹1,095 crore was collected through TDS on VDA transfers over three fiscal years, with Maharashtra leading as the highest contributor at ₹660 crore, followed by Karnataka and Gujarat. In stark contrast, some northeastern and hill states reported negligible or zero VDA tax activity, underscoring uneven adoption and enforcement across regions.
Surveys conducted under the Income Tax Act have also pointed toward non-compliance among major crypto exchanges, resulting in unaccounted income and shortfall in TDS.
The Call for Global Coordination
Given the vulnerabilities associated with VDAs—such as tax evasion and black-money flows—the Indian government is advocating for a unified global regulatory framework. Crypto exchanges, both domestic and those catering to Indian users from abroad, are now subject to the PMLA reporting requirements, which include mandatory reporting of suspicious transactions to India’s Financial Intelligence Unit (FIU-IND).
Officials recognize that no single nation can effectively regulate cryptocurrencies in isolation. Therefore, coordinated global standards and mutual reporting protocols are deemed essential. India is actively engaging in multilateral forums to push for this much-needed global consensus.
Upgrading Investigative Capabilities
In response to the complexities of cryptocurrency, the Indian government has begun training its tax and enforcement officials in specialized areas like digital forensics, blockchain analysis, and crypto-trail tracing. This training aims to enhance the investigative capacity of officials, thus improving oversight in this dynamic sector.
Short-term digital forensics programs are also being rolled out at institutions like the National Forensic Sciences University (NFSU) in Goa, further demonstrating India’s commitment to building expertise in this domain.
As the Parliament continues the debate around formalizing a cryptocurrency law, these developments signal a pressing need for comprehensive oversight and hint at a tightening surveillance environment, reflecting India’s recognition of the intertwined nature of financial and geopolitical challenges in the crypto space.
