India’s Tax Department Flags Virtual Digital Assets Risks to Parliamentary Panel

TLDR:

• Tax department warns anonymous transfers bypass regulated financial intermediaries effectively 
• Offshore exchanges and private wallets make beneficial ownership detection nearly impossible for officials 
• Multiple jurisdictions in VDA transactions prevent proper tax assessment and recovery efforts 
• India maintains cautious stance on cryptocurrencies despite lobbying pressure from various quarters 

Virtual digital assets face renewed scrutiny from Indian authorities as the income tax department presented concerns to the parliamentary standing committee on finance. 

The department outlined several challenges in regulating these instruments, ranging from anonymous transactions to jurisdictional complexities. This development aligns with the Reserve Bank of India’s stance against cryptocurrencies. 

Tax authorities emphasized difficulties in tracking offshore exchanges and detecting taxable income from these borderless digital instruments.

Regulatory Challenges in Tracking Digital Assets

The tax department’s presentation focused on technical barriers that prevent effective oversight of virtual digital assets. 

Officials highlighted how anonymous, borderless and near-instant value transfer enables fund movement without regulated financial intermediaries, according to a person familiar with the discussions. 

These transactions move across borders instantly, creating gaps in the traditional monitoring framework.

Offshore exchanges and private wallets compound the problem by keeping beneficial ownership information hidden. 

Decentralised platforms operate outside conventional regulatory structures, preventing authorities from identifying actual asset holders. 

The opacity of these systems makes determining taxable income accurately nearly impossible for officials. Multiple jurisdictions become involved in single transactions, creating verification challenges for tax officials. 

Cross-border flows remain largely unchecked despite recent information-sharing initiatives between countries. This limitation prevents proper assessment and reconstruction of transaction chains, hampering tax collection efforts substantially.

Enforcement Difficulties and Policy Response

Cryptocurrency platforms operating from overseas locations present unique enforcement challenges for Indian authorities. Issuing summons or collecting tax deducted at source becomes problematic when dealing with foreign entities. 

Many exchanges remain unregistered with the Financial Intelligence Unit, placing them beyond the tax department’s jurisdiction entirely.

India maintains a cautious approach toward cryptocurrencies and stablecoins despite lobbying from various quarters. 

The Reserve Bank has repeatedly raised concerns about the absence of underlying assets backing these instruments. 

Enforcement agencies worry about potential misuse for money laundering and terror financing activities through these channels.

Tax authorities have implemented several safeguards to address these concerns and track beneficiaries more effectively. 

Mandatory registration requirements now apply to entities dealing in virtual digital assets within the country. The introduction of tax deducted at source provisions aims to create better oversight mechanisms for authorities.