The Inside Story of How India’s Crypto Exchanges Were ‘Inspected’ by Tax Agencies

Two agencies, five months, five crypto exchanges, 100-plus officers, more than Rs 700 million in tax recovery, and yet the scale of the misdemeanor, excused by “ambiguity,” remains unknown.

Jan 7, 2022 at 5:38 a.m. UTC
Updated Jan 7, 2022 at 1:43 p.m. UTC

The Takeaway:

  • Tax agencies have several other crypto exchanges on their radar but expect these “inspections” to serve as a deterrent that will make the industry voluntarily fall in line.
  • Agencies have been examining crypto exchanges’ finances in India since August 2021, the investigation is still ongoing and currently focused on evaluating transactions to correctly assess tax liability.
  • The overall tax owed may be manifold the current amount of Rs 84.35 crore (i.e. 843.5 million Indian rupees, or $11.3 million), but calculating the tax on different types of transactions is a lengthy process. Currently, the tax owed has been self-calculated by exchanges but not verified as final amounts by agencies since data by exchanges has not been completely compiled and made available to agencies for verification.
  • Experts deeply entrenched in India’s crypto industry requested anonymity and said that “this was more willful evasion than interpretation-based ambiguity.”

A tax official flagged a mismatch between revenue earned, transactions made and tax paid by several crypto exchanges in India this past August.

This official did not open a formal investigation at the time – but within the next four months, tax agencies would collect over Rs 84 crore ($11 million) from less than half a dozen crypto exchanges in back taxes and fees.

“We keep on looking for data of different companies. We don’t necessarily open files. If we did, there would be hundreds of files for investigation,” said a source with direct knowledge of the matter, requesting not to be named.

The impression in the crypto industry has been that government officers are not tech-savvy and don’t understand crypto. But he wasn’t an ordinary tax official. He was part of a team that could trace its intellectual capacity to some of the finest technical institutions in India. This team had been watching the crypto space closely and, due to their technical background, equipped to understand the evolving space.

His job was to find and stop tax evasion and collect back taxes. The institution that gave him these powers was India’s Directorate General of Goods and Services Tax Intelligence (DGGI), a body entrusted with the task of “collection, collation and dissemination of intelligence relating to evasion of indirect tax.” The DGGI functions under the purview of the all-powerful Ministry of Finance.

As the DGGI, which is a national law enforcement agency, began scrutinizing the tax returns of crypto exchanges, a similar, but independent operation had begun in India’s financial capital, Mumbai.

A regional agency tasked with fighting tax evasion in Mumbai, the Goods & Services Tax and Central Excise Mumbai Zone (CGST Mumbai Zone), had begun studying a big fish in India’s crypto-sphere – WazirX.

The relatively esoteric nature of cryptocurrencies and their exchanges was factored into the investigation. Since it was a brand new space for the tax agencies, the discoveries about crypto exchanges and the deeper nuances around cryptocurrencies occurred simultaneously.

This novelty and the regulatory uncertainty surrounding crypto (India has yet to complete legislation to regulate cryptocurrencies) led to the agencies giving exchanges more room to operate. Exchanges and agencies refrained from calling what happened next as “raids,” which has a somewhat derogatory connotation associated with willful tax evasion.

CoinDesk spoke to multiple sources with direct knowledge of the matter to determine the sequence of events.

The ‘inspections’

The tax agencies insisted that they conducted “inspections” and after scrutinizing the limited documents (financial returns of exchanges) and third-party sourced information (intelligence gathering) they felt the need to check the books (seeking out documentary proof to make the case stick).

On Sept. 1, not too far from the DGGI office in New Delhi, an inspection team traveled to the outskirts of the national capital to the city of Noida, a tech hub and a major revenue contributor to India’s most populated state, Uttar Pradesh.

The team went to the office of BuyUCoin, owned by M/S I Block Technologies Pvt. LTD.

BuyUCoin was the first of four exchanges DGGI tax officials “inspected” because “it was the most obvious and glaring transgressor,” said a source with direct knowledge of the matter.

BuyUCoin refers to itself as “India’s Most Secure Crypto Exchange,” boasting of “1 [million] plus customers” and allowing customers and merchants to “buy bitcoin and other cryptocurrencies at the best prices.”

BuyUCoin’s transgression was not paying an 18% tax on the commission it earned on all its transactions on its platform since its inception in 2017.

India’s goods and services tax (GST) code was introduced in 2017 and had a tumultuous and controversial path. GST is an indirect tax that service providers, retailers and consumers must pay.

At the time, the company’s chartered accountant said that BuyUCoin did not need to pay taxes for crypto transactions. Between 2018 and mid-2020, the question of paying taxes did not arise as crypto transactions had more or less fizzled out after India’s central bank, the Reserve Bank of India (RBI), published a circular effectively preventing banks from supporting or engaging with exchanges in crypto transactions.

In March 2020, the Indian Supreme Court countered the RBI’s stance, effectively reopening the gates for crypto in India. In late 2020, BuyUCoin reexamined its position on paying taxes by consulting a GST specialist. This specialist suggested BuyUCoin pay its unpaid tax dues, and it took the company more than eight months to collect data from the past 3 1/2 half years.

BuyUCoin CEO Shivam Thakral claims the exchange was about to pay up its dues in a few days, but tax officials entered its office on Sept. 1, 2021, around 2:00 p.m. They left around midnight, with Rs 1.04 crore (around $140,000) and a small sum of interest and penalties, taking a total of Rs 1.1 crore (around $147,600) in total. The penalty was provided voluntarily, not demanded. Tax officials have not determined the exact amount of penalty since the investigation is still ongoing.

The official BuyUCoin statement admitted “to some human mistakes from our end” due to a “lack of clarity on filing procedures.”

On Sept. 22, the same tax officials reached Mumbai to inspect CoinDCX, which is owned by M/s Neblio Technologies PVT. LTD.

The exchange describes itself as “India’s largest and safest cryptocurrency exchange.” CoinDCX says it has over 7.5 million active users and a daily turnover of Rs 100 crore ($13.4 million).

CoinDCX’s violation was similar to BuyUCoin.

“They too were suppressing their taxable value and not paying GST on every transaction they earned commission on,” said a source, and others agreed.

Additionally, CoinDCX said it was providing some export services, which are non-taxable, but in reality the exchange had made no exports at all.

CoinDCX paid Rs 15.7 crore as tax plus interest of Rs 1.4 crore for a total of Rs 17.1 crore (around $2.2 million). They did not pay any penalty.

By Oct. 7, the tax officials had reached the office of CoinSwitch Kuber, owned by M/s Bitcipher Labs LLP, in India’s IT hub, Bengaluru. CoinSwitch Kuber had 1 million Indian users at the start of 2021 but ended the year with 14 million and a 3,500% rise in transaction volume.

“CoinSwitch was a different case,” said a source with direct knowledge of the scrutiny.

“They were paying taxes on Indian transactions. However, they were also entertaining transactions by foreigners thinking it is export of services, which is not taxable. They were not taking into account the fact that whether it be an Indian or a foreign transaction they were making a commission and therefore that commission is taxable.”

CoinSwitch Kuber paid tax and interest to the tune of Rs 12.7 crore and interest of Rs 1 crore for a total of Rs 13.7 crore (around $1.8 million).

The next day, since the tax team was already in Bengaluru, they visited the office of UnoCoin, owned by Unocoin Technologies Pvt. LTD. UnoCoin has “1.5 million-plus people trading” on its platform and labels itself “India’s most trusted crypto exchange.”

UnoCoin was paying tax on transaction fees but not when they would tweak the buying and selling rate to make it competitive. They would keep the buying rate a little higher than the average buying rate and the selling rate a little lower than the average selling rate. They were not paying GST on the margins.

They paid tax, interest and penalty of Rs 1.8 crore, plus an interest of 1.1 crore, and a penalty of Rs 0.3 crore for a total of Rs 3.2 crore ($429,408).

The DGGI collected a total of Rs 35.1 crore ($4.71 million) from the four cryptocurrency exchanges. The tax amount was Rs 31 crore, but interest, and in some cases penalty, was additional as self-admitted liabilities.

Meanwhile, Mumbai’s regional agency, Goods & Services Tax and Central Excise Mumbai Zone (CGST Mumbai Zone), was scanning tax documents available to it related to India’s biggest exchange, WazirX, which is managed by M/s Zanmai Labs Pvt Ltd.

WazirX had announced that its user base had grown 10 times in 2021 to 10 million and recorded trading volumes of over $38 billion year to date.

By Dec. 30, CGST Mumbai Zone tweeted its findings, a tax violation of Rs 40.5 crore (approximately $6 million) and an additional Rs 8.7 crore as interest and penalties for a grand total of Rs 49.2 crore ($6.6 million).

WazirX said it had been “diligently paying tens of crores worth of GST every month” in a statement.

“There was an ambiguity in the interpretation of one of the components which led to a different calculation of GST paid. However, we voluntarily paid additional GST in order to be cooperative and compliant. There was and is no intention to evade tax. That being said, we strongly believe that regulatory clarity is the need of the hour for the Indian crypto industry. It will also provide us with more clarity on taxation so that we can work in sync with the lawmakers, and continue to be a responsible industry player,” the statement said.

The two agencies conducted five “inspections” that involved the “complete cooperation” of all five exchanges, more than 100 officers, in at least four cities, over several months, to recover Rs 84.35 crore ($11.3 million) in back taxes without any material seizures.

Algorithms

This Rs 84.35 crore sum was an accumulation of the taxes owed through August 2021 and based on data calculations by the cryptocurrency exchanges themselves. The exchanges’ algorithms have yet to collect complete data on all the transactions taking place regarding the matter and have yet to determine the tax figure due based on their misinterpretation of the law, whether willful or not.

All of the exchanges estimated and self-evaluated the figure they owed till August 2021 and paid interest as well as penalties in some cases based on those figures.

“Trade has been happening so fast that it is difficult for exchanges to determine their own taxable revenue,” the sources said.

Ambiguity or willful evasion

Sidharth Sogani, the founder and CEO of cryptocurrency research organization Crebaco, said the 84.35 crore figure did not make any sense.

“In absence of regulations, the direct and indirect taxes are being charged based on assumptions. Without clear guidelines, you will not know who is right. The GST department should make that more clear,” Sogani said.

Not everyone agrees.

One individual, deeply entrenched in India’s crypto industry, requested anonymity because of potential partnerships with crypto exchanges, said that “this was more willful evasion than interpretation-based ambiguity.”

For exchanges to suggest outright ambiguity while paying back taxes and penalties appears disingenuous. Even if the exchanges are given the benefit of the doubt that they misunderstood the law, their interpretation appears to be both convenient and disproportionate, government and law experts suggested.

“Legislation around crypto may be awaited, but the law is absolutely clear about tax implications on services provided by way of facilitation of crypto trade,” a government source said.

“No question of willful evasion. This is purely an interpretive issue,” said Rajat Mittal, a Supreme Court lawyer dealing with taxation matters for more than a decade and who has a deep interest in the crypto-sphere. Mittal tweeted an entire thread about the “inspections.”

“Paying up the tax, interest and penalty, was not an admission of guilt. It was potentially to avoid a show-cause notice which would have not only prolonged the matter but would have also made them face a potential 100% penalty rather than 15% penalty, not to mention the ire of the power of tax agencies,” Mittal said.

Sources with direct knowledge of the inspections believed the exchanges were trying to willfully evade paying taxes, but not necessarily to make a profit. Instead, these individuals believe the startups were caught in a perfect storm of focusing on building their businesses to cater to the concerns of venture capitalists, adding customers, inadequate taxation background of young founders and a careless attitude towards the complicated nature of taxation calculations while regulations are awaited.

“In preliminary scrutiny you don’t know if the taxpayer is genuine or has a mala fide intention,” said a source with direct knowledge of the matter. “The investigation is still going on. But prima facie this appears willful. It is unbelievable that with venture capitalist funding, big legal teams, and IT experts, this would happen. They knew what they were doing.”

A spokesperson for WazirX explained there needs to be clarity on classification of fees received on coins and better understanding is required in terms of different layers of taxation for the crypto asset industry.

“Even industry bodies believe the tax department’s stand is justified” as reported by Economic Times.

“It is absolutely clear. The exchanges were trying to evade tax to make profits. There can be no other logical reason for such a convenient interpretation,” said Vijay Pal Dalmia, a lawyer who was the first to approach the Supreme Court of India in 2017 seeking a complete ban on cryptocurrencies.

On the other hand, “why would Indian crypto exchanges relishing in a burgeoning sector, take such a needless risk for such tiny profits?” asked Mittal.

They are well aware of the potential whiplash they could face from unfriendly regulatory watchdogs and the government, which has reportedly already decided to ban private cryptocurrencies, Mittal said. The potential for future growth far outweighs the needless risk in this case.

A government source believed their actions will act as deterrents, and other crypto exchanges will fall in line and pay up unpaid taxes.

Although the tax authorities did admit that other crypto platforms were on their radar, they did not share the number of platforms they were considering “inspecting.”

DISCLOSURE

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Amitoj Singh is CoinDesk's regulatory reporter covering India. He holds BTC and ETH below CoinDesk's disclosure threshold of $1,000.