Indian tax authorities back RBI in calls to throttle crypto trade

India’s Income Tax Department has thrown its weight behind the Reserve Bank of India’s push to restrict cryptocurrencies, citing widespread underreporting and the difficulty of tracing offshore trades, according to government documents reviewed by Reuters.

The documents, dated May and June, show the central bank restating a position it has held for years.

The RBI wants India’s policy on digital assets to be “leaning towards prohibition.” It also wants banks and other financial institutions barred from holding, trading, or taking any exposure to crypto or privately issued stablecoins, stating that such links could spread trouble across the country’s financial system.

What is new is the tax department’s public backing. Officials told the government that trades routed through overseas exchanges are hard to monitor, which raises the risk of evasion.

In the financial year that ended in March 2023, fewer than a quarter of the 645,000 people who transacted in crypto actually declared those gains on their returns. Transactions on foreign platforms and peer-to-peer channels, especially those priced in rupees, remain difficult to track and tax.

What are the RBI’s thoughts on stablecoins and India’s monetary sovereignty?

According to the RBI, stablecoins that are pegged to foreign currencies, the most common being US dollars, have the potential to impact India’s monetary sovereignty negatively.

In a background note to the Standing Committee on Finance a few days earlier, the central bank stated that applying ordinary financial regulation to crypto would amount to legitimizing “speculative products that are not beneficial to the economy.”

The bank put India’s market at 54 FIU-registered service providers and 39.3 million KYC-verified users holding about 20,437 crore rupees, roughly $2.4 billion.

However, the RBI’s position is not supported by all in the country. The Institute of Chartered Accountants of India (ICAI) told the same committee that digital assets offer a strategic opportunity if paired with the country’s fintech strengths. ICAI wants to see a full law that covers issuance, trading, and custody.

How has India been managing crypto-related operations?

Indian crypto has sat in a legal limbo since 2020, when the Supreme Court struck down the RBI’s 2018 order that had cut banking access to the sector. A 2021 draft bill to ban private cryptocurrencies was drawn up; however, it was never introduced in Parliament, and a promised discussion paper has slipped repeatedly.

So far, the government has leaned on tax and compliance as a tool to manage the space, applying a 30% levy on gains and a 1% tax deducted at source on transactions.

However, critics say that the approach did not curb crypto activities as it only pushed them out of the country.

In February, a member of parliament, Raghav Chadha, stated that about 73% of India’s crypto trading volume had shifted to foreign exchanges, with around 120 million users on overseas platforms. Chadha then told the Parliament that “prohibition is not protection. Regulation is protection.”

RBI also says widespread adoption of crypto is not great for India’s macroeconomic exposure, as it could increase capital outflows and make the external deficit worse. A situation that has already played out during the US-Iran conflict, which saw raised oil prices and affected India, which is dependent on energy imports.

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