Vedant Sahu
In a move that could significantly impact the cryptocurrency landscape in India, the Financial Intelligence Unit (FIU) of the finance ministry has intensified its regulatory scrutiny. On December 28, the FIU issued directives to major global exchanges like Binance, KuCoin, and seven others, emphasizing the necessity for these entities to register as ‘reporting entities’ in India and to comply with local tax filing requirements.
This development comes at a time when the Indian crypto market is already facing challenges due to stringent tax laws and a lack of clear regulatory frameworks. The FIU’s directive mandates these exchanges, serving Indian users, to file detailed statements with the income tax department, a move that aligns with India’s efforts to regulate financial transactions within its borders.
The action against offshore crypto exchanges operating in India under money laundering laws could have far-reaching implications for local exchanges. According to Sidharth Sogani, founder and chief executive of Crebaco, a cryptocurrency research firm, “Indian exchanges are highly dependent on global giants like Binance for liquidity. With no substantial crypto reserves of their own and a nearly 10% arbitrage margin in crypto token trade, local exchanges face a precarious future if these global platforms are restricted.”
The Indian crypto market has seen a significant downturn in trading volumes following the introduction of a 30% income tax on crypto trades and an additional 1% tax deduction at source (TDS) on transactions in 2022. Data from Crebaco highlights a dramatic 93% and 60% fall in daily average trading volumes for WazirX and CoinDCX, two of India’s leading crypto firms, since the tax implementation.
Gaurav Mehta, Founder of Catax, a blockchain auditing and taxation firm, weighs in on this issue: “The 1% TDS on crypto trades has been a severe blow to the industry. This taxation model, while ensuring regulatory oversight, has inadvertently stifled the market, making India a less attractive destination for crypto investments and operations.”
The latest directives from the FIU have also complicated the plans of Indian crypto exchanges looking to move offshore. A key industry executive noted, “The intention to shift operations abroad was largely to circumvent the complex compliance and tax landscape in India. However, with the FIU’s recent actions, these plans might no longer offer the strategic or financial relief exchanges were hoping for.”
Despite regulatory challenges, the global crypto market has shown resilience. Bitcoin, the bellwether token, has seen a significant rise in its value, fuelling optimism among investors. However, the Indian crypto market remains cautious, with the combined challenges of regulation, taxation, and liquidity overshadowing the potential benefits of a global market rally.
The FIU’s recent actions underscore the Indian government’s commitment to regulating the crypto market. While this may lead to a more secure and transparent market in the long run, the immediate challenges faced by local exchanges and investors cannot be overlooked. The need for a more balanced regulatory approach, one that fosters innovation while ensuring compliance, is more pressing than ever in the rapidly evolving world of cryptocurrency.