How to deal with tax and money laundering issues

By Vipul Kharbanda and Aman Nair

Even as crypto-assets continue to establish themselves as a staple of global financial and technology markets, governments face the challenge of applying regulatory systems to them that are not suited to the nuances that exist in the market space. crypto-assets. However, this can often lead to the emergence of regulatory uncertainties, gray areas and loopholes, all of which can be detrimental to both regulators and consumers.

This blog post seeks to analyze two ways in which these discrepancies have manifested themselves in the Indian context: taxation and money laundering.

What taxes actually apply to cryptoassets?

With the extraordinary increase in the number of people in India who have invested and made a profit through investments in crypto-assets, a question that often arises is how the gains from these activities can be taxed.

First, in the case of indirect taxation, there is ambiguity over the applicability of the GST to providers of crypto-asset services. Services provided by crypto exchanges and other crypto service providers are subject to the levy of GST on the amount of fees or commission charged by the exchange for its services. Since there is no Service Accounting Code (SAC) specified for crypto services, there is a lack of clarity as to the slab and in which category the services would be likely to be taxed. This could have been one of the reasons that precipitated the recent TPS raids on the offices of various crypto exchanges such as WazirX, CoinDCX, Coinswitch Kuber, etc.

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In addition, since crypto assets can also be defined as goods and property, there is a risk that if other conditions are met, individual cases of crypto asset sales may also result in the levy of GST. as a tax on the sale of “goods”.

This lack of clarity also permeates the direct tax regime when it comes to cryptoassets. It is quite clear that for business entities such as crypto exchanges etc., income from crypto activities would fall under the business or professional income item, since crypto related activities are their primary business. However, it is not so clear whether the profits made by individual or retail investors would be taxed as part of their regular income.

Even if the profits from crypto trading are not part of an individual’s regular income, they could still be taxed as capital gains. This is due to the broad definition of the term “capital property” contained in the Income Tax Act 1961, which defines capital property as “property of any kind held by an appraised person, whether or not it is related. to his business or profession ”. Since Indian law defines the term “movable property” as “property of any kind except real estate”, crypto-assets can be considered to fall under the term of movable property and, therefore, if gains from crypto-assets are not subject to are taxed as income under the Income Tax Act, 1961, they may be subject to tax as gains from the sale of ‘“Fixed assets” under the Act.

The central government seems to share the same point of view, as evidenced by the central government’s responses to questions from the Rajya Sabha, where the Minister of State for Finance clarified that “the gains resulting from the transfer of cryptocurrencies / assets are chargeable to tax as income, depending on the nature of the holding thereof. With respect to crypto exchanges, the government’s position is that income earned from crypto exchanges and other platforms providing crypto services is taxable in respect of business or profession under Chapter IV of the law. of 1961 on income tax.

It is to address this unnecessary lack of clarity that the government must take the appropriate steps to change the tax system to integrate crypto-asset transactions into the tax net. The exact shape and outlines of the scheme should ideally be determined by taking input from all stakeholders, including crypto firms, retail investors, financial institutions, etc.

Money laundering issues

Another key consideration facing the Indian government is the propensity to use crypto-assets to facilitate money laundering. With both the government and the RBI expressing concerns about this, as well as rumors of alleged conversions of money to crypto taking place outside of formalized exchanges, it is imperative that the matter be addressed in the future.

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From the outset, it should be remembered that the possibility of money laundering is not a problem limited only to crypto-assets and crypto-asset trading. In fact, the Financial Action Task Force (FATF), the global money laundering and counterterrorism watchdog, noted that from 2021 onwards, cryptoasset use cases as a tool for money laundering remain limited compared to cases using other traditional financial instruments. That being said, cryptoassets do have some unique characteristics, such as pseudonym, decentralization, and cross-border functionality that predispose them to money laundering in ways that other financial instruments may not – and might exhibit. a new long-term problem.

To this end, the Indian government needs to take a two-pronged approach to this issue: apply existing frameworks and adopt crypto-specific frameworks.

By enforcing existing rules, the RBI could enforce existing AML and counter-terrorist financing (CFT) standards to crypto exchanges and other crypto service providers. When developing crypto-asset-specific measures, the FATF frequently publishes guidance specifically addressing how its existing recommendations on money laundering can be amended to make them more applicable to crypto-assets. effective. These guidelines include recommendations such as:

  • Introduction of a registration system for crypto-asset service providers for easier monitoring.
  • Mandatory and Strict Consumer Due Diligence Practices
  • Risk assessment procedures, etc.

The Indian government stands to gain from adopting these guidelines within its own regulatory framework.
It is imperative that the government address the issue of taxation and regulation of cryptoassets so that the unique potential of this technology can be appropriately harnessed rather than imposing harsh measures that would discourage the industry. and other investments in this sector.


Aman Nair is Policy Officer at the Center for Internet & Society, India, specializing in FinTech, Data Governance and Digital Cooperative Research. Vipul Kharbanda is a non-resident researcher at CIS, focusing on the organization’s fintech research program. The opinions expressed are personal and do not necessarily reflect the opinions of MediaNama.

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