Context & Background

• India ranks #1 in crypto adoption globally (Chainalysis 2024).
  
  
• $6.6 billion invested by Indian retail investors (NASSCOM).
  
  
• 8 lakh jobs projected by 2030 in crypto/Web3 sector.
  
  
• Supreme Court (May 2025): “Banning may be shutting your eyes to ground reality.”
  
  

3. Regulatory Gaps

• No clear regulatory framework for VDAs in India.
  
  
• RBI warnings since 2013 → circulars banning banks from crypto dealings.
  
  
• Supreme Court overturned RBI ban in 2020.
  
  
• Lack of central bank or monetary authority control over VDAs.
  
  
• No unified licensing or compliance architecture.

4. Taxation Measures

• 2022: India imposed two major taxes:
  
  
  • 30% tax on crypto gains.
    
    
  • 1% TDS on all VDA transactions (Section 194S).
    
    
• Section 115BBH: Disallows loss offsets and deductions.
  
  
• Result: Offshore trading boomed → ₹2.63 trillion traded offshore vs ₹1.03 trillion on Indian platforms.

5. Challenges from Current Policy

• Over-regulation without clarity → shift to offshore/non-compliant platforms.
  
  
• Revenue loss due to tax evasion and VPN-based trading.
  
  
• User evasion tactics: VPNs, mirror platforms, foreign wallets.
  
  
• India’s stance contrasts with jurisdictions offering sandbox models and licensing (e.g., UAE, Singapore).

6. Law Enforcement & Cybersecurity Gaps

• Lack of cross-border coordination, leading to fraud and fund diversion.
  
  
• VDA scams in 2024: Losses over $230 million.
  
  
• Weak cyber incident reporting, no dedicated fund insurance system.
  
  

7. Role of International Bodies

• FATF recommendations on AML/CFT compliance.
  
  
• India’s progress cited through Financial Intelligence Unit–India (FIU) collaboration with Indian VASPs.
  
  
• Emphasis on “travel rule,” KYC compliance, and reporting standards.
  
  

8. Need for a Future-Proof Framework

• Balanced regulation combining:
  
  
  • Innovation enablement
    
    
  • Tax compliance
    
    
  • Consumer protection
    
    
  • Investor education
    
    
• Suggests establishing a dedicated digital assets regulatory body or expanding SEBI’s jurisdiction.

9. Governance & Ethical Keywords

• Technological neutrality
  
  
• Regulatory sandbox
  
  
• Crypto-tax dilemma
  
  
• Decentralised risk, centralised impact
  
  
• User protection vs innovation
  
  
• Digital sovereignty
  
  
• Inter-agency coordination
  
  
• Responsible financial innovation

10. Way Forward

• Develop a unified regulatory framework (possibly under SEBI or a new crypto regulatory authority).
  
  
• Enable regulated Indian VASP platforms to attract global capital.
  
  
• Link crypto regulation to India’s fintech and digital public infrastructure ecosystem (like UPI, ONDC).
  
  
• Promote safe innovation, not surveillance-led regulation.

PRACTICE QUESTION:

Critically analyse the impact of India’s current tax and compliance regime on the domestic virtual digital asset ecosystem. How does it influence offshore migration and revenue losses?

(12.5 marks / 200 words)