CBDT Engages with Cryptocurrency Platforms
The Central Board of Direct Taxes (CBDT), India’s principal tax authority, is taking proactive steps to engage with local cryptocurrency platforms as discussions about a tailored tax framework escalate. In mid-August, the CBDT reached out to various domestic crypto players to gather their insights regarding the existing regulations governing virtual digital assets (VDAs) in India. The agency is particularly interested in understanding the current effectiveness of these rules while exploring the necessity for a more robust legal structure specifically designed for the crypto market.
Identified Issues and Stakeholder Input
Significant issues have been identified by the CBDT, including:
- The 1% tax deducted at source (TDS) applied to cryptocurrency transactions.
- Restrictions on offsetting losses.
- The lack of regulations addressing offshore trading activities.
The authority also sought input on which governmental entity—including the Ministry of Electronics and Information Technology (Meity), Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), or the Financial Intelligence Unit-India (FIU-IND)—ought to manage a new legal framework.
Data Collection and Global Comparisons
Stakeholders are being asked to provide data on capital outflow, detailing how much trading has migrated abroad due to factors like high taxes, regulatory limitations, and issues with liquidity. Additionally, comparisons with tax policies in other countries are encouraged to assess India’s competitive position in the global market.
Operational Queries and Tax Treatment Strategies
The CBDT raised operational queries on implementing TDS, outlining technical challenges related to:
- Evaluating the residency of trading parties.
- Asset valuation in volatile environments.
- Reconciling transactions in peer-to-peer exchanges.
Stakeholders are also queried on whether to apply different TDS treatment strategies for retail users compared to institutional investors and market makers.
Industry Concerns and Regulatory Measures
This outreach comes amid growing industry apprehension that excessive taxation and unclear regulations are driving cryptocurrency ventures out of India. Unlike the equities market, where investors benefit from capital gains taxes and loss adjustments, profits from crypto are subjected to a flat tax rate of 30%, with no relief for losses. Additionally, the RBI’s cautious approach and ambiguous guidelines under the Foreign Exchange Management Act (FEMA) have resulted in several banks refusing to provide services to cryptocurrency companies.
Notably, some crypto exchanges have begun offering derivative products designed to mitigate the impact of TDS, while others strive to align their operations with the Crypto-Asset Reporting Framework (CARF) established by the Organisation for Economic Co-operation and Development (OECD). Many within the Indian crypto landscape now advocate for comprehensive regulatory measures instead of outright bans, a sentiment that is gaining traction worldwide.
