India Evaluates Crypto Market Taxation Amid Industry Demands for Policy Reform
The Central Board of Direct Taxes (CBDT), India’s top direct tax authority, reportedly reached out to domestic cryptocurrency platforms in mid-August with a series of inquiries regarding the country’s current virtual digital asset (VDA) framework. The tax body questioned the effectiveness of existing regulations and sought industry feedback on whether a separate, comprehensive legal regime is warranted.
Among the key areas of concern are the 1% tax deducted at source (TDS) on crypto transactions, the inability to offset losses, and the absence of clarity on offshore trading. The CBDT also asked for suggestions on which government body—such as the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Ministry of Electronics and Information Technology (Meity), or Financial Intelligence Unit-India (FIU-IND)—should oversee a potential new legal framework.
Stakeholders have been urged to share data on capital flight, including how much trading volume has shifted overseas, citing high taxation, regulatory gaps, and liquidity challenges. Comparisons with other jurisdictions were also requested to evaluate India’s tax competitiveness.
The CBDT further raised operational questions around TDS implementation, including the difficulty of determining counterparties’ residency, valuing assets in volatile markets, and reconciling peer-to-peer transactions. Respondents must additionally address whether different TDS treatment should apply to retail, institutional, and market-making entities.
The outreach follows increasing industry concerns that punitive taxation and lack of regulatory clarity are pushing crypto businesses offshore. In contrast to equity markets, where traders benefit from capital gains treatment and loss adjustments, crypto gains are taxed at a flat 30%, with no allowances for losses. The RBI’s cautious stance, combined with opaque rules under the Foreign Exchange Management Act (FEMA), has led many banks to deny services to crypto firms. Despite regulatory hostility, some exchanges have introduced derivative products to minimize TDS impact, while others seek alignment with the Organisation for Economic Co-operation and Development’s Crypto-Asset Reporting Framework (CARF). Proponents argue that comprehensive regulation, not prohibition, is now the global norm—a position increasingly shared by the Indian crypto ecosystem.
