Indian traders receive notices as regulators ramp up crypto tax evasion scrutiny

The Income Tax Department of India has intensified its crackdown on the crypto industry by sending more than 44,000 tax notices to those who did not report income or transactions related to virtual digital assets (VDAs).

The Central Board of Direct Taxes (CBDT) clarified that the measures are part of a wider initiative to decrease tax evasion and bring more scrutiny into one of the fastest-growing crypto markets in the world.

Minister of State Pankaj Chaudhary said that the department has undertaken focused reassessment drives and seized assets under the Income Tax Act, 1961. The CBDT also affirmed that it is applying advanced data analysis tools to compare the tax filings to crypto transaction details of Virtual Asset Service Providers (VASPs). 

Non-compliant users are subjected to severe penalties under the law, such as a fine of 200% on tax understatements. This is part of the NUDGE program launched by the CBDT, aimed at voluntary compliance.

Under this initiative, the officials have delivered 44,057 emails and text messages to flagged users. The messages act as cautionary notes to the traders who purchased or sold digital assets without reporting them on their income tax returns.

High adoption, high scrutiny

Compared to regulation, crypto adoption has raced ahead in India, with approximately 100 million users and a growing adoption rate of 7.1% of the population. The high market penetration rate has made the government pay more attention to sealing tax loopholes in the industry.

In FY23 and FY24, officials collected 705 crore rupees (approximately $80 million) in reported crypto earnings. But enquiries have found undisclosed earnings of at least 630 crore ($75 million). These results have led to tax review, raids, and seizures all over the country.

To add to this pressure, the Enforcement Directorate has seized 42.8 crore ($4.8 million) in assets of an Indian national who swindled international investors with a fake Coinbase site. The defendant is already serving 10 years in the United States for running a scam amounting to $20 million.

Due to increasing risks and an expanding market, India has started licensing local and foreign exchanges by its Financial Intelligence Unit (FIU). High-profile names such as Binance, Coinbase, KuCoin, and Bybit have been approved to be run under the control of the FIU. The registration enables the Indian authorities to track transactions and collect tax more effectively.

Crypto tax laws remain tough and unchanged

The crypto tax regime in India is still one of the strictest in the world. The framework, introduced in 2022, adds a flat tax of 30% on all gains of VDAs under Section 115BBH. There is also the Tax Deductible at Source (TDS) of 1% that traders pay on all transactions above certain limits.

The framework applies to digital assets, such as cryptocurrencies and NFTs. It also charges an 18% Goods and Services Tax (GST) on service fees levied by exchanges on wallet and trading services.

Despite the industry’s objections, the government has remained adamant about revising these rules. Rather, enforcement agencies have upped surveillance and compliance tools. The CBDT applies systems such as Project Insight and the Non-Filer Monitoring System (NMS) to align blockchain activity and tax reporting.

According to Indian law, failure to claim crypto transactions will lead to a 50% penalty on unpaid taxes. If intentional misreporting is established, the fine can increase to 200%.

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