India's tax authorities and the central bank jointly warn about the risks of cryptocurrency usage

Source: CryptoTale Original Title: India Tax Authority Joins RBI in Warning on Crypto Use Risk Original Link:

Overview

• Tax officials told Parliament that the structure of crypto assets weakens tracking capabilities and complicates regulation.
• The Reserve Bank of India and tax agencies reached an agreement before the budget, and crypto risks remain unresolved.
• Cross-border transactions and offshore platforms limit India’s regulatory scope, despite AI data initiatives.

India’s Income Tax Department has joined the Reserve Bank of India in expressing concerns about virtual digital assets ahead of the federal budget announcement. Officials warned that enforcement loopholes could undermine the government’s ability to track and tax crypto activities. These concerns were raised this week before lawmakers, as India continued to impose heavy taxes on crypto trading despite the lack of a formal regulatory framework.

On Wednesday, tax officials briefed the Standing Committee on Finance on risks related to cryptocurrencies and other virtual digital assets. Finance Minister Nirmala Sitharaman will present the ninth federal budget on February 1.

Enforcement Challenges Raised Before Parliament

Authorities told the committee that crypto technology complicates monitoring and compliance efforts. They stated that borderless transfers and pseudonymous wallets reduce visibility for tax enforcement. Transactions often occur outside regulated banking channels, creating gaps that officials find difficult to fill.

Tax officials described several technical barriers to monitoring crypto transactions. They pointed out the borderless nature of digital assets, which allows value transfers across jurisdictions without central intermediaries. This design diminishes the effectiveness of domestic enforcement tools.

Officials also highlighted pseudonymous wallet addresses as a key challenge. These addresses do not directly reveal user identities. Therefore, linking crypto activity to individual taxpayers requires extensive data analysis and cooperation from platforms.

Additionally, authorities said many crypto transactions bypass regulated banking systems. Without bank intermediaries, standard reporting and tracking are weakened. Officials warned that these features complicate audits and delay detection of non-compliance.

Budget Timing and Policy Context

These concerns reflect broader unease within institutions about privately issued cryptocurrencies. Even as India continues to impose a flat 30% tax on crypto trading, such unease persists. Traders are also required to pay a 1% withholding tax on each transaction.

Despite collecting these taxes, India has yet to introduce comprehensive crypto legislation. Therefore, officials rely on tax measures and enforcement tools rather than a complete regulatory framework. This approach has drawn attention amid the tense budget preparations.

India has prioritized the rollout of a central bank-backed digital currency. Commerce and Industry Minister Piyush Goyal stated in October that the heavy taxation aims to prevent users from being trapped in unbacked crypto assets.

Cross-Border Activities and Data Tools

Tax authorities also expressed concern over cross-border crypto activities. Officials told lawmakers that single transactions often involve multiple jurisdictions. This overlap limits enforcement scope, especially when transactions are conducted overseas.

The problem worsens when exchanges are not registered with India’s Financial Intelligence Unit. In such cases, access to transaction data is limited. Officials said this hampers India’s ability to take effective compliance actions.

In July last year, authorities announced new measures to improve oversight. They said they would use AI and global data sharing under the crypto asset reporting framework. The system allows cross-matching of TDS data from exchanges with income tax returns.

Officials stated that when discrepancies exceed ₹1 million (about $1,200), notices will be issued. This aims to narrow the gap between reported income and actual trading activity.

As regulators strengthen coordination, one question remains critical for policymakers and investors alike: Can India enforce crypto taxation without a clear regulatory framework?