India’s Tax Authorities Embrace AI for Cryptocurrency Compliance
In a significant move to ensure compliance with tax laws in the burgeoning cryptocurrency sector, India’s tax authorities are harnessing the power of artificial intelligence alongside international agreements for data exchange. This initiative comes as officials emphasize the fading opportunity for digital asset transactions to evade scrutiny in the financial system.
Enhanced Detection Capabilities
According to Ravi Agrawal, the Chairman of the Central Board of Direct Taxes (CBDT), the department has expanded its capabilities to detect tax evasion among crypto traders through advanced data analytics and collaborative information sharing with other countries.
The CBDT now taps into a substantial dataset comprising over 6.5 billion digital transactions within India and is also integrating the principles of the Crypto-Asset Reporting Framework (CARF), established by the Organisation for Economic Co-operation and Development (OECD). This framework obligates cryptocurrency platforms to gather and relay user transaction details to respective tax authorities, facilitating automatic cross-border exchanges of tax information aimed at curbing tax evasion.
“The ultimate objective is to regulate crypto transactions under international tax agreements to ensure coordinated efforts among nations,” noted Saravanan Pandian, CEO of KoinBX, indicating a shift towards more regulated global digital asset trading.
However, he acknowledged it is premature to gauge the full impact of these measures on crypto exchanges, prompting watchers to remain observant of government policies as they unfold.
AI and Tax Compliance
The Income Tax Department is leveraging artificial intelligence to reconcile tax deducted at source (TDS) data submitted by crypto service providers with personal income tax returns (ITRs). Notices for discrepancies exceeding ₹1 lakh (approximately $1,200) are being issued to individuals, highlighting the proactive stance of tax officials. Agrawal stressed that the extended digital powers only apply in specific circumstances, such as during searches or surveys, ensuring that taxpayer privacy is upheld.
Digital evidence examination is increasingly critical, given the shift towards online transactions via digital banking, cryptocurrency platforms, and cloud storage. CA Sonu Jain from 9Point Capital articulated that India is gearing up for a future where the visibility of digital wallets and seamless data exchanges become the norm in an industry historically marked by anonymity.
He noted that current regulations permit access to cryptocurrency accounts of taxpayers solely during official raids or checks, balancing enforcement with the need to protect personal privacy.
Recent Tax Reforms and Future Outlook
This latest crackdown builds on India’s 2022 reforms in its crypto taxation policy, which introduced a uniform 30% tax on profits from digital currencies and a 1% TDS on transactions surpassing a designated threshold. Since the implementation of this tax structure, the government has accrued $818 million (₹700 crore) in crypto taxes, with collections amounting to $323 million in the first year and $525 million in the subsequent year.
Despite these advancements, Minister of State for Finance Pankaj Chaudhary informed the Lok Sabha that real-time matching of Virtual Digital Asset (VDA) transactions in ITRs against filled data from Virtual Asset Service Providers (VASPs) is not being executed yet, signaling areas for future improvement in tax enforcement.
As the regulatory environment evolves in India, it is becoming increasingly imperative for cryptocurrency traders to adhere to tax obligations, as authorities ramp up their oversight efforts in this dynamic domain.
