Cryptocurrency Taxation and Anti-Money Laundering Regulation: An Indian Legal Perspective

Abstract

There have been many challenges that have arisen due to the growth in cryptocurrency and other virtual digital currencies in India. These virtual currencies help to conduct innovative types of digital transactions and investments; however, the decentralised nature of virtual currencies poses many challenges for the detection of tax evasion and illegal financial transactions. The regulatory framework that has been chosen by the government in India is based on the taxation and anti-money laundering laws instead of legalization of private cryptocurrencies as legal tender. The inclusion of the provisions regarding taxation of such virtual digital assets (VDA) by the Income-tax Act along with the provision of tax on specific income earned from the transfer of VDA and tax deduction at source provisions is quite essential. On the contrary, the specified activities concerning the virtual digital assets have also been included under the Prevention of Money Laundering Act, 2002. In this regard, the present research aims at making a critical analysis of the legal framework of India in terms of cryptocurrency taxation and anti-money laundering regulations, with an emphasis on the analysis of the provisions of the Income-tax Act, Prevention of Money Laundering Act and the regulatory roles of the Financial Intelligence Unit-India. The research focuses on the issues created due to pseudonymous transactions, offshore exchanges, cross-border transactions, tax evasion and money laundering through the use of digital assets. The paper mentions that while there have been increased regulatory measures in India concerning their tax policies and money laundering laws, there is fragmentation in the regulatory process and technological advancement which makes enforcement difficult.