Indian Tax Authorities Join RBI in Raising Red Flags Over Crypto

India’s income tax authorities have aligned with the Reserve Bank of India in expressing concerns about virtual digital assets, warning that enforcement challenges could undermine the government’s ability to monitor and tax crypto transactions as the Union Budget approaches.

Crypto Concerns Raised Before Parliamentary Finance Committee

On Wednesday, tax officials presented their concerns regarding cryptocurrency and other virtual digital assets to the parliamentary standing committee on finance, according to a report by the Times of India. The discussion focused on the growing difficulty of regulating and supervising crypto activity within the existing tax and enforcement framework.

Borderless and Pseudonymous Transactions Create Enforcement Gaps

Officials highlighted core features of crypto technology — including borderless transfers, pseudonymous wallet addresses, and transactions conducted outside regulated banking systems — as major obstacles to effective oversight. These characteristics, they argued, make it harder to track income, detect violations, and ensure tax compliance.

Finance Ministry Seeks to Curb Decentralized and Offshore Platforms

According to a source familiar with the matter, the Finance Ministry is seeking to limit the influence of decentralized systems, privacy-focused tools, and offshore exchanges. The Financial Intelligence Unit and the Income Tax Department are reportedly aligned on this stance, reflecting a coordinated institutional approach.

FIU-Registered Exchanges Also Under Scrutiny

Even exchanges registered with India’s Financial Intelligence Unit are facing closer examination. Authorities have flagged reports of crypto laundering that are now being investigated by the Ministry of Home Affairs, alongside concerns about centralized exchanges involving alleged misuse of customer funds, excessive leverage, and insider trading.

Institutional Unease Ahead of Sitharaman’s Ninth Budget

These developments underscore broader institutional discomfort with privately issued cryptocurrencies as Finance Minister Nirmala Sitharaman prepares to present her ninth consecutive Union Budget on February 1. Crypto traders continue to face a 30% flat tax and a 1% tax deducted at source, despite the absence of a comprehensive regulatory framework.

India Prioritizes RBI-Backed Digital Currency

Rather than embracing private crypto assets, India remains focused on promoting an RBI-guaranteed digital currency. Union Minister Piyush Goyal previously stated that heavy taxation on crypto is intended to deter users from becoming “stuck” with unbacked digital assets.

Budget 2026–27 Scheduled Despite Sunday Timing

The Cabinet Committee on Parliamentary Affairs has proposed February 1 as the date for presenting the Union Budget 2026–27, even though it falls on a Sunday. The Budget Session is scheduled to begin on January 28.

Cross-Border Crypto Activity Complicates Jurisdiction

Tax officials also pointed to jurisdictional challenges arising from cross-border crypto transactions. With multiple countries involved and platforms often operating overseas or remaining unregistered with India’s FIU, enforcement reach remains limited.

AI and Global Data Sharing to Target Tax Evasion

Last July, authorities announced plans to deploy artificial intelligence and international data-sharing mechanisms under the Crypto-Asset Reporting Framework. The initiative aims to cross-check tax deducted at source data from exchanges with income tax filings, triggering notices when discrepancies exceed ₹1 lakh, or roughly $1,200.

Experts Warn of Regulatory Ambiguity and Investor Risk

Industry voices caution that the tax department’s opposition to broader crypto adoption reflects deeper institutional discomfort rather than a coherent regulatory strategy. Raj Kapoor, founder and CEO of the India Blockchain Alliance, warned that the current approach risks creating fear without offering clarity, investor protection, or effective systemic oversight.