With alternative investments such as crypto-assets becoming popular, and the consequent increase in crypto-crime, it can be expected that tax authorities will correspondingly step up scrutiny over transactions involving such assets. The concept of crypto-assets itself is, like the technology underpinning it, constantly evolving. At present, it is understood to include assets that can be held and transferred in a decentralised manner without involving traditional financial intermediaries.
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Obhan & Associates
However, cross-border crypto-asset transactions are particularly hard to track, as international regulators are slowly discovering. Conventional financial transactions are tracked using the Common Reporting Standard (CRS), set up by the Organisation for Economic Co-operation and Development (OECD), and under which large amounts of data are collected and stored. These include such information as the identities of account holders, and the balance of and income sent or credited to accounts. These data are transmitted to participating tax administrators for jurisdiction-specific compliance and enforcement as required. However, as crypto-assets can exclude traditional financial intermediaries and evade authorities, tax administrators are unable to track transactions involving such assets adequately. Recognising this, the OECD amended the CRS and created the supplemental Crypto-Asset Reporting Framework (CARF) to tackle newly emergent issues relating to crypto-assets. As with the CRS, the CARF contains model laws that can be adopted by individual jurisdictions with an accompanying commentary to aid in implementation. CARF provides for the identification of crypto-assets that will be covered; the entities and individuals that will be subject to data collection and reporting; the transactions subject to reporting and the information to be reported, and the due diligence procedures to identify crypto-asset users and controlling persons. It also determines the relevant tax jurisdictions for reporting and exchange. At present, CARF envisages that exchanges between relevant crypto-assets and fiat currencies; exchanges of relevant crypto-assets, and transfers of relevant crypto-assets will be subject to reporting.
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Obhan & Associates
With the introduction of the CARF, the CRS has also undergone significant changes. Most importantly, the CRS now includes new digital financial products in its scope, recognising that they are a credible alternative to conventional financial holdings currently subject to CRS reporting. Reporting outcomes under the CRS have been enhanced. The amendments seek to ensure that information channels between CRS and CARF operate efficiently and are not duplicated, while still maintaining an adequate degree of operational flexibility for both frameworks.
India does not yet regulate crypto-assets, although the budget for the financial year 2022-23, announced a new regime for taxing gains and income from virtual digital assets (VDA). Such VDAs include cryptocurrencies, non-fungible and similar tokens. The rate of the tax is proposed to be 30 per cent plus surcharges and local charges on the transfer of any VDA under the Income Tax Act, 1961 (act). However, the law is yet to be introduced. The definition of VDAs includes neither distributed ledger technology (DLT) in general nor blockchain in particular. The act also requires the person responsible for paying any consideration to withhold one per cent of the consideration at source as income tax, where a resident makes such a transfer.
The CARF is still open for discussion, but India is already a signatory to the CRS. With the country taking the G20 presidency during the coming year, it is expected that crypto-taxation will be hotly debated by regulators and diplomats here. It is fully a matter for discussion whether India will choose to align with the OECD proposal on reporting crypto-asset transactions or whether it will develop its own standards.
The CARF is a useful mechanism for governmental agencies, exchanges and individuals to report crypto-asset transactions to each other in a standardised way, and to bring about efficient cooperation and enforcement at the global scale. It may also encourage jurisdictions to consider with greater urgency how to regulate crypto-assets and how to help create an equitable playing field for taxation in the sector.
Ashima Obhan is a senior partner, and Aparna Amnerkar is an associate at Obhan & Associates.
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