Crypto Traders Under Scrutiny: India's Crackdown on TDS Evasion via Binance

The Indian Income Tax department has intensified its efforts to tackle tax evasion by crypto traders using Binance, the world's largest cryptocurrency exchange. This move is part of a broader campaign to ensure compliance with the 1% tax deducted at source (TDS) on cryptocurrency transactions. As authorities scrutinize transactions, traders are facing penalties, including a steep 30% tax on their total turnover if they fail to demonstrate TDS compliance.

Introduction to TDS and Crypto Trading

The introduction of a 1% TDS on crypto transactions in India is a significant regulatory development aimed at curbing tax evasion and ensuring more transparent financial dealings. This provision applies to both peer-to-peer (P2P) transactions and swap deals, which are common practices among crypto traders. Despite these regulations, many traders have found ways to bypass the system, particularly by using international exchanges like Binance.

Binance and Tax Evasion

Binance's Global Reach and Popularity

• High Liquidity and Accessibility: Binance offers high liquidity and a vast array of cryptocurrencies, making it a preferred platform for many traders worldwide.
• Decentralized Operations: As a decentralized operation, Binance allows users to maintain privacy and avoid some local regulations, which can be leveraged by traders seeking to evade taxes.

Indian Tax Authorities' Response

In recent weeks, the Indian Income Tax department has been actively investigating Binance traders. Notices have been served to provide proof of TDS deduction or substantiate its non-applicability. The focus is not only on the transactions themselves but also on the source of funds used by these traders, requiring them to submit their income tax returns for relevant years.

Key Points of Investigation

• Transaction Data Analysis: Authorities are analyzing transaction data downloaded from Binance to assess compliance with TDS regulations.
• Penalties for Non-Compliance: Traders failing to comply with TDS rules may face a 30% tax on their total turnover, which is significantly higher than the standard tax on gains.
• Capital Flight Concerns: There are concerns about capital flight via unmonitored wallets, which could lead to undisclosed income and further tax evasion.

Impact on Indian Crypto Market

The Indian crypto market has been coping with stringent regulations since the introduction of TDS. Many traders have shifted their assets from local exchanges to international platforms like Binance to avoid these regulations. However, as the tax authorities broaden their scope, this strategy may no longer be viable:

Challenges Faced by Traders

• Withdrawal Difficulties: Local exchanges have made it challenging to withdraw funds, pushing traders to seek alternatives abroad.
• Offshore Holdings: Some individuals have transferred their assets to foreign platforms under the guise of legitimate reasons, which could attract regulatory scrutiny.

Future of Crypto in India

Despite these challenges, cryptocurrency remains a promising sector in India, with many proponents advocating for clearer and more favorable regulations. However, until then, traders must navigate the existing legal framework carefully to avoid penalties and regulatory issues.

Taxation Landscape for Crypto Traders

Understanding TDS Rules

• Applicability: The 1% TDS applies to all cryptocurrency transactions, including P2P and swaps.
• Penalties: Non-compliance can lead to a higher tax on total turnover, impacting profitability.

Techniques Used to Evade TDS

• Unmonitored Wallets: Traders use foreign wallets that are not monitored by Indian authorities, making it harder