Indian users, numbering in the millions, engaged in transactions with offshore crypto exchanges to avoid tax obligations. This had adverse effects on compliant service providers and led to significant revenue losses for the government.
India’s financial intelligence unit recently issued notices to nine offshore crypto exchanges, including Binance, for non-compliance with anti-money laundering regulations and initiated measures to halt their operations within the country.
These virtual digital assets (cryptocurrency) service providers primarily operate from tax havens such as the Seychelles, British Virgin Islands, and Cayman Islands, with some having addresses in Singapore or Hong Kong.
The Indian government mandated that all VDA service providers engaged in activities like virtual digital asset exchange and fiat currency transfer must be registered with the financial intelligence unit. While 31 providers were registered, numerous offshore entities serving Indian users had not complied, potentially operating outside India’s anti-money laundering framework.
Kraken, KuCoin, Gate.io, and Bitfinex were among the exchanges served notices for failing to adhere to the requirements of the Prevention of Money Laundering Act, 2002.
We will delve deeper into this issue.
Why Cryptocurrency Exchanges Fall under PMLA Regulations?
Cryptocurrencies, based on blockchain technology, operate on decentralized networks and are created anonymously. This circumstance allows them to operate outside traditional regulatory controls. However, due to their nature, cryptocurrencies have become increasingly associated with money laundering activities and illicit trades, such as drugs and other illegal goods.
The Financial Action Task Force (FATF), a global anti-money laundering watchdog, established the first international standards to address the money laundering and terrorist financing risks associated with virtual assets in June 2019.
In March 7, 2023, India expanded the scope of the Prevention of Money Laundering Act (PMLA) to include cryptocurrencies within its anti-money laundering and counter-financing of terrorism framework. This notification encompassed the exchange of virtual digital assets (VDAs) for fiat currencies, VDA exchanges, VDA transfers, provision of financial services linked to VDA offers and sales, safekeeping, and administration of VDAs, as well as instruments enabling control over them. This measure aimed to enable the Indian government to regulate and oversee crypto transactions more effectively.
Subsequently, on July 4, India’s financial intelligence unit mandated all crypto exchanges to register as reporting entities under the PMLA. As reporting entities, crypto exchanges must adhere to Know Your Customer (KYC) norms, maintain transaction records, report suspicious activities, and establish internal control procedures to combat money laundering and terrorist financing. It is important to note, as emphasized by the government, that these obligations are activity-based and not contingent on physical presence in India.
India’s Stance on Cryptocurrencies: What You Need to Know?
The Indian government has taken significant steps regarding the taxation and regulation of cryptocurrencies. Initially, crypto transactions were subjected to income tax before crypto exchanges were brought under the Prevention of Money Laundering Act (PMLA).
As of April 1, 2022, income from Virtual Digital Assets (VDAs) transfers became taxable at a rate of 30%, along with surcharge and cess. Moreover, starting from July 1, 2022, any transaction exceeding ₹10,000 was subject to a 1% tax deducted at the source.
In a recent development, the government issued a warning to offshore crypto exchanges about potential action under the PMLA for non-compliance.
A study conducted by Esya Centre, a technology policy think tank, revealed that the 1% tax deduction at source prompted Indian users to resort to offshore VDA exchange platforms and other untraceable channels, leading to substantial revenue loss for the government. Approximately 3-5 million users shifted to offshore entities following the announcement of the tax deduction in the Union Budget in February 2022. According to the study, transactions worth ₹3.5 lakh crore occurred on offshore platforms between July 2022 and July 2023, constituting almost 90% of the total VDA trades by Indians.
It’s important to note that India has not outright banned or implemented regulations on cryptocurrencies, but it has incorporated them into the Income Tax Act and the PMLA. Consequently, individuals and businesses are permitted to invest in, hold, and transact in VDAs. Moreover, in the past year, India urged for a global consensus on regulating cryptocurrencies at the New Delhi Summit of the G20 Leaders.
As India’s cryptocurrency regulations continue to evolve, staying informed about the latest developments will be crucial for individuals and businesses engaging in crypto transactions within the country.
What’s Next?
The Financial Intelligence Unit has sent a request to the Ministry of Electronics and Information Technology to block the URLs of offshore crypto exchanges that are operating illegally in India without adhering to the PMLA provisions. If these crypto exchanges, which have been issued show cause notices, do not meet the Act’s requirements, Indian residents will no longer be able to conduct transactions on these platforms.
In such a scenario, users of these exchanges may face the risk of potential financial loss if they are unable to transfer their crypto funds to a fully compliant exchange as per Indian regulations. However, the offshore exchanges are expected to provide users with a sufficient window to move their funds should they decide not to register with India’s financial intelligence unit.
