CBDT probes crypto tax evasion in India

India’s Central Board of Direct Taxes (CBDT) has launched an investigation into unaccounted crypto incomes among traders in the country. According to the agency, they are looking into possible tax evasion and money laundering through the use of digital assets.

The CBDT stated that there is a likelihood that residents in the country have been laundering unaccounted income through digital assets, naming avenues like investments in high-risk digital assets and other aspects. The tax agency is presently looking into and verifying individuals and entities it believes are connected to the use of high-risk virtual digital assets (VDAs) and appear to have failed to comply with key provisions in the Income Tax Act, 1961.

India’s CBDT set to investigate cases of unaccounted crypto incomes

According to officials familiar with the matter, these investigations are majorly linked to individuals and firms that have either failed to disclose their digital asset income or incorrectly filed out their tax filings. Under Section 115BBH of the Income Tax Act, introduced in the Finance Act, 2022, income from transfers of VDAs is taxed at a flat rate of 30%, plus applicable surcharge and cess. The law forbids deductions of any expenses except for the cost of acquisition, disallowing set-off or carry forward of losses from VDA transactions.

Government data analytics has also shown widespread non-compliance with the rule, causing the CBDT to launch a full investigation into residents who are involved. The data showed that a significant number of taxpayers are either refusing to report digital asset gains in the designated schedule VDA of their income tax returns (ITR), or paying tax at a low rate while incorrectly claiming benefits such as cost indexation.

The CBDT has also matched ITR filings with TDS data submitted by Virtual Assets Service Providers (VASPs), who are commonly known as crypto exchanges. According to officials, it was the discrepancies in the information provided by both agencies that have led to a country-wide scrutiny of unaccounted crypto incomes. Taxpayers found defaulting could be subject to further verification or scrutiny under the law.

Unaccounted crypto income defaulters to face consequences

Over the last few weeks, the board mentioned that it has alerted thousands of individuals and firms it believes are involved, calling them “high-risk defaulters.” The agency has also urged them to review and, if necessary, update their ITR information to accurately reflect income from their VDA transactions.

The development is coming off the back of the ongoing push by the CBDT to promote voluntary compliance in these activities. The agency is using its Non-intrusive Usage of Data to Guide and Enable taxpayers (NUDGE) program, under its “Trust Taxpayers First” philosophy. This is the third NUDGE campaign that the department has initiated in the last six months, with previous efforts focusing on the disclosures of foreign assets and the withdrawal of ineligible deductions claimed under Section 80GGC.

This latest development comes off the back of a recent update by the Reserve Bank of India where it maintained its stance on digital assets. The bank was quick to make the update through its governor Sanjay Malhotra, which came after the Supreme Court urged the country to look into crypto regulations. “RBI has maintained a consistent stance on this issue. A govt committee is currently examining the matter. We remain concerned about the potential risks crypto poses to financial instability and monetary policy,” Malhotra said in a press briefing.

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