Will the Crypto Asset Reporting Framework Bring Clarity to Investors?

OECD guidance: With the aim of increasing transparency between nations, the OECD (Organisation for Economic Co-operation and Development) has developed the Crypto Asset Reporting Framework (CARF). The Common Reporting Standard (CRS) required jurisdictions to obtain information from financial institutions and banks and exchange such information with other jurisdictions. CARF is a step forward in this direction as crypto-assets do not automatically fall within the CRS area which dealt with traditional financial assets and fiat currencies. With CARF, the scope of reporting has been extended to include digital assets and consequently has visibility over intermediaries, exchanges and suppliers of e-wallets.

The OECD defines cryptoassets as a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions. Crypto-assets are those that can be held and transferred in a decentralized manner, without the intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens (NFTs). There are certain exceptions to this, such as currency issued by the central bank, specified electronic money products, etc. The framework provides guidance on various aspects of entities and individuals, subject to data reporting responsibilities and data collection requirements, types of transactions covered, and relevant information to be reported, etc.

India has signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Therefore, India will soon have to comply with the necessary framework so that the flow of information is smooth.

Crypto taxation in India: Digital asset taxation in India was introduced in Budget 2022 when a 30% tax on all gains from the transfer of Virtual Digital Assets (VDA) was proposed, without allowing deductions for expenses (other than the cost of acquisition) or set-off of any losses. Further, the buyer is required to deduct TDS at 1% on all VDA remittances beyond a specified threshold with an intention to broaden the tax base and avoid tax leakage due to non-reporting.

India’s tax regulations define VDAs as any information or code or number or token (not Indian currency or foreign currency) generated through cryptographic means or otherwise, by whatever name. It provides a digital representation of value exchanged with or without consideration, with the promise or representation of having intrinsic value or acts as a store of value or unit of account and includes its use in any financial transaction or investment, but not limited to investment schemes, and may transmitted, stored or traded electronically, including non-fungible tokens or assets of a similar nature, by whatever name, and any other digital asset as notified by the Central Government. Circulars were issued in June 2022 to provide further guidance on withholding tax compliance requirements.

With the announcement of CARF, the government has an opportunity to draft regulations now, considering the reporting guidelines of CARF. This could lead to using CARF for investors as well as service providers resident in India and covering a wide range of digital assets. To meet the requirements, service providers will need an improved data collection mechanism such as KYC documents, to ensure that the identity of each of the participants is established, ensure that appropriate taxes are withheld for each transaction, appropriate mechanism for record keeping and reporting, etc. Investors may be required to publish norms in addition to the current provision on tax contributions and tax deductions.

The guidance from the OECD is a welcome move to bring standardization and regulation to the trading of digital assets, although it may increase the liability of stock exchanges. It will provide visibility for regulators and tax authorities about the transactions, as well as clarity for investors and stock exchanges about their obligations.

Aarti Raote is a partner with Deloitte India.