Key Insights
- Income Tax Department is currently targeting the year 2021-22, a period when traders considered non-filing as their right since there was no clear policy regarding this financial year.
- The authorities are using powers conferred under Section 148A to issue what are known as the Show Cause Notices, thereby giving the government the power to reopen previous tax return filing, if it finds that some income has been left out.
- The department is not accepting self-declaration. Instead, it is aligning the data with the Indian stock exchanges, TDS returns, and Annual Information Statement (AIS).
- Many notices have come up stating the gross trading volume as undisclosed income. So, traders having a volume of 1 crore and profits of 5 lakhs will be called into account for the whole 1 crore volume.
- Non-provision of acceptable reasons may lead to reassessment, interest, and penalties ranging from 50 per cent to 200 per cent of the amount evaded.
The Taxman is Watching: 44,000 Crypto Traders are in the Scanner
The era of “stealth trading” in the Indian crypto market has officially come to an end. The Income Tax Department has embarked on sending out thousands of notices under Section 148A of the Income Tax Act in a huge coordinated move. These notices are mostly falling in the inboxes of investors who were active in the 2021-22 financial year but did not report their digital asset holdings or profits on their tax returns.
This action will be a big step towards the Indian government considering virtual digital assets (VDAs). Although the 30 per cent flat tax was officially enacted in the 2022 Budget, the department is retroactively seeking to tax income on crypto under general income provisions, even before the explicit enactment of the so-called Crypto Tax laws.
The Data Matching Trap
The main catalyst of such notices is a huge discrepancy between what was reported by the taxpayer and what was recorded by the government’s internal systems. The tax department can now access a granular level of data through the portal, called Project Insight. This includes:
- Exchange Data: Records of the large Indian exchanges that link all trades to a PAN card.
- TDS Records: Section 194S, the 1 per cent Tax Deducted at Source (TDS) has left a permanent digital paper trail of all sales orders.
- Banking Intelligence: Huge deposits and withdrawals to bank accounts of known crypto-related persons.
In case the amount of income estimated by the government does not match your submitted ITR, the system will automatically put the account under a Section 148A investigation.
The Gross Volume vs. Net Profit Problem
The calculation of the “escaped income” is one of the most distressing aspects for recipients of such notices. In most of the reported incidents, the tax department is reporting the total trading volume as opposed to the actual profit. As an example, when a given investor moved 50,000 INR in twenty trades, the system could report a total of 10 Lakhs as undisclosed income.
The recipients are then put in a situation where they are required to present an explanation in detail at the ledger level. They have to demonstrate that the 10 Lakhs is turnover and not new untaxed wealth. This necessitates some record keeping, which was not taken by many casual traders three years ago.
The Evolution of Crypto Surveillance in India
To comprehend the reasons for this occurrence at the moment, it is necessary to consider the history of Indian crypto regulation. By 2021, the market had entered into a wild west euphoria. Prices were soaring to all-time highs, and millions of new users were being onboarded. Back then, it was widely thought that there was no Crypto Law, so no gains had to be reported.
Nevertheless, the Central Board of Direct Taxes (CBDT) has never ceased to insist that any type of wealth creation is subject to taxation. The 1 per cent TDS introduced in July 2022 was the last puzzle piece, which enabled the government to identify traders in real-time. Through a comparison of the new TDS data with the previous bank records and exchange KYC, the department has been in a position to create a detailed profile of the so-called ghost traders.
This crackdown is also included in the Indian commitment to the Crypto-Asset Reporting Framework (CARF) of the G20. This global accord will ultimately enable India to see trades by Indian citizens on overseas exchanges such as Binance or Bybit, and it will be almost impossible to conceal assets offshore.
Also Read: India Takes the Lead in the World, Crypto Adoption at 119 Million Users
Frequently Asked Questions
What happens in case I get a Section 148A notice?
You will have to answer within the time period stated (typically 7 to 30 days). Do not ignore it. You will be required to rebuild your trade history for the 2021-22 year with exchange CSV files and submit a point-by-point rebuttal of your actual capital gains versus the volume of capital gains estimated by the government.
Am I allowed to make an Updated Return (ITR-U)?
In case you have not yet received a notice, but you notice that you made an error in your previous filings, you can file ITR-U (Updated Return). This will enable you to remit the tax and an extra 25 per cent to 50 per cent penalty to regularise your books before the department starts an official investigation.
What will be the consequences of non-compliance?
In case the department finds out that you knowingly failed to report income, they can either impose a penalty of 50 per cent on under-reporting or 200 per cent on misreporting. Extreme cases of high-value evasion also have a legal option of prosecution and jail time under the Income Tax Act.
Is this the case when I have traded in foreign exchanges only?
At present, the department mainly possesses the data of Indian exchanges. Nevertheless, since the majority of users transferred money to foreign exchanges through an Indian on-ramp (such as depositing INR to purchase USDT), the first trail is present. Moreover, international data-sharing treaties will soon enable access to foreign exchange data by Indian officials.
Disclaimer: BFM Times acts as a source of information for knowledge purposes and does not claim to be a financial advisor. Kindly consult your financial advisor before investing.
